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Coronavirus

The Coronavirus Economy: How Bad Will It Get?

The epidemic, and the weapons being used to fight it, are having devastating effects on the economy.

Seoul stock exchange on March 18
Seoul stock exchange on March 18
Jean-Marc Vittori

PARIS — How can such a tiny creature wreak so much havoc on the economy? The novel coronavirus, which has killed 0.00006% of the world's population to date, has already cost shareholders $2.5 trillion in a single day. And it is estimated to erase at least $1 trillion of GDP in 2020, according to experts from the United Nations Conference on Trade and Development.

According to some, such disarray can only be explained by irrational behavior or Keynesian "animal spirits." While it's all moving a bit fast, logical decisions can explain most of it.

The starting point: a deadly and contagious virus, one that makes men and women sick, sometimes to the point of losing their precious lives. The effect: the most effective short-term solution to contain the illness is isolation. In 1720, the southern French town of La Ciotat was spared from the plague — which killed a quarter of the population of the surrounding region — because the walls surrounding the town allowed the filtering of comings and goings. Similarly in 2020, China succeeded in reversing the coronavirus epidemic by drastically limiting travelling.

More than the irrational, it is uncertainty that dominates.

The public authorities in France are interested in restricting movement to slow the spread of the epidemic over time in an effort to avoid congestion of hospitals, French Minister of Health Olivier Véran explained. From there, it will become possible to identify the major levers of the epidemic on the economy, pertaining to supply and demand, the "real" and the "financial." The potential impact is massive.

1. Production

In China, at the beginning of February, authorities ordered factories to close (or rather, not to re-open after New Year's celebrations) in the highly industrialized region of Wuhan where the epidemic started. Tens of millions of Chinese people were asked to stay at home. Transport services were severely reduced. At the health level, these decisions are justified. Economically, they weigh heavily on Chinese production, which could fall in the first quarter of 2020 for the first time in over 40 years. This same dynamic is now spreading across Europe. Italy has been hit hardest by the epidemic, with the whole country in quarantine since March 9. Here too, activity will inevitably decline, along with economic exchange.

2. Supply

The closing of certain factories blocks others downstream which depend on their production. Stretching over the past 20 years, the "value chains' cannot withstand the breaking of a link. Carlos Tavares, CEO of car manufacturer PSA, gives an example: "Of the 4,000 parts making up an automobile, 3% come from China. But if we are missing a single part, we cannot deliver the car." Manufacturers will have to organize themselves differently, with shorter and more local chains. In the meantime, they risk being blocked.

3. Work

The virus sends some employees to the hospital and condemns many others to isolation. In China, travel restrictions have trapped millions of vacationers away from work ... All of this causes a loss of manpower and therefore, production. Not to mention the indirect impacts. The closure of schools in Japan and Italy is forcing many parents to stay at home, since sending the children to their grandparents' is out is out of the question, the latter being more susceptible to the virus.

4. Demand

Supply is not the only one to be struck by the virus. Planes fly, but few travelers want to risk of not being able to return for weeks due to quarantine measures, causing the travel industry to take a massive hit. Public places are deserted because authorities have limited access to them (salons, concerts, sports fields) and consumers don't dare going out (hotels, restaurants, shops). The side-effects of this are daunting: weakened airlines will buy fewer planes, employees with reduced incomes will spend less: After exports, investment and consumption will suffer.

5. Financing

In many companies, revenues fall faster than expenses. Bank accounts will tighten, as seen in the end of 2008. It will be difficult to repay loans with corporate debt rising high. The banks are also likely to suffer in turn. Investors have reason to worry; no one knows the duration and extent of this epidemic. No one can quantify the power of each of these levers, and nobody knows what the government is truly prepared to do to limit the economic damage. More than irrational thoughts, it is uncertainty that dominates now. And that is the real poison for the economy.


For the coming weeks, Worldcrunch will be delivering daily updates on the coronavirus global pandemic. Our network of multilingual journalists are busy finding out what's being reported locally — everywhere — to provide as clear a picture as possible of what it means for all of us at home, around the world. To receive the daily brief in your inbox, sign up here.

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Economy

Europe's Winter Energy Crisis Has Already Begun

in the face of Russia's stranglehold over supplies, the European Commission has proposed support packages and price caps. But across Europe, fears about the cost of living are spreading – and with it, doubts about support for Ukraine.

Protesters on Thursday in the German state of Thuringia carried Russian flags and signs: 'First our country! Life must be affordable.'

Martin Schutt/dpa via ZUMA
Stefanie Bolzen, Philipp Fritz, Virginia Kirst, Martina Meister, Mandoline Rutkowski, Stefan Schocher, Claus, Christian Malzahn and Nikolaus Doll

-Analysis-

In her State of the Union address on September 14, European Commission chief Ursula von der Leyen, issued an urgent appeal for solidarity between EU member states in tackling the energy crisis, and towards Ukraine. Von der Leyen need only look out her window to see that tensions are growing in capital cities across Europe due to the sharp rise in energy prices.

Stay up-to-date with the latest on the Russia-Ukraine war, with our exclusive international coverage.

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In the Czech Republic, people are already taking to the streets, while opposition politicians elsewhere are looking to score points — and some countries' support for Ukraine may start to buckle.

With winter approaching, Europe is facing a true test of both its mettle, and imagination.

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