The extent of the economic damage of coronavirus will depend in large part on the health containment effort - GulfToday

The extent of the economic damage of coronavirus will depend in large part on the health containment effort

World Stocks

Photo has been used for illustrative purposes.

Ben Chu, The Independent

“In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could,” observed the late economist Rudi Dornbusch.

Looking at the financial markets’ response to the threat of a Covid-19 pandemic, the first part of that classic piece of wisdom certainly applies.

Why on earth did it take traders and investors until this week to wake up to the danger posed to global economic activity and corporate profits by the spread of this new virus?

It’s unsatisfactory to say it wasn’t obvious until Monday that the coronavirus would spread in a sustained way beyond China.

Traders are supposed to anticipate risks and price them in to company share prices before the event, not after. And major outbreaks of Covid-19 outside China were always a serious risk, as anyone who listened to the briefings of disease modellers and virologists knew.

And the shutdown of vast swathes of the Chinese economy – the world’s second largest economy and dominant driver of global growth – in itself should have surely prompted at least some downward adjustment of companies’ share prices. As it was, American share indexes carried on hitting new peaks, even as the concerning news from on the ground in China, Korea and elsewhere kept flowing in.

It’s hard to disagree with Nouriel “Dr Doom” Roubini that markets were guilty of complacency, if not myopia. This hasn’t been a great advert for the theory that markets are “efficient”.

But what about the unravelling “happening faster than you thought they could”, the second part of Dornbusch’s observation? That’s less obvious. The scale of the sell-off of shares this week has certainly been big. Globally shares are on track for their worst week since the financial crisis. Around $6 trillion in market value has been lost over the past eight days according to calculations by Bloomberg.

Yet this is not – as of yet – out of line with previous stock market corrections. Thursday’s Dow Jones Index’s fall, measured in points, was the largest in its history. That’s somewhat misleading though. As an index’s overall value gets larger over the decades any day’s average losses in points will likely be larger than those in the past. In percentage terms the 4.4 per cent decline on Thursday did not even make the top 100 daily drops for the venerable American share index.

And remember that the value of the Dow soared by 60 per cent between February 2016 and the first half of this month. Global stock markets are estimated to have increased in value by $17 trillion in 2019 alone.

But, of course, the key question is how much worse things will get? Are we still near the top of the rollercoaster’s dip, with the real plunge yet to come?

And this is where it’s folly to predict with any degree of confidence. While it’s reasonable to criticise traders for being blind for too long to the risks of Covid-19 inflicting damage on the global economy, we should beware assuming, as a baseline scenario, that it will inflict massive damage, or cause the global recession that some analysts are now talking about.

We simply don’t know. The progress of the health crisis will be driven by the progress of the virus. To some extent that’s out of human hands, depending on the biology of this pathogen.

But good public health policies – government-to-government information sharing, quarantines, isolation – can impede it and hopefully contain it. The extent of the economic damage of this outbreak will depend in large part on that health containment effort.

But it will also depend on containing panic among the public, and that includes panic in financial markets. The danger of a market overreaction is that it breeds more fear and compounds the economic damage by undermining investment.

“We have nothing to fear but fear itself,” said the US president Franklin Roosevelt in the midst of the Great Depression of the 1930s. That’s going too far in these circumstances; the threat to life posed by Covid-19 is real.

But we should certainly beware the contagious impact of economic and financial panic too.

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