A world of hurt: how pandemics such as COVID-19 affect the global economy

Since COVID-19 reared its head in December 2019, it has become increasingly clear that pandemics pose one of the biggest threats to the global economy

A world of hurt: how pandemics such as COVID-19 affect the global economy
As a result of the COVID-19 outbreak, the OECD warned on March 1 that global growth could halve this year compared to its previous forecast 

While the world only became aware of COVID-19 on December 31, 2019, the first person known to have contracted the disease fell ill about a month earlier. Much is still unknown about patient zero and how they came to be infected, but a study by Chinese researchers suggested the individual had no connection to the wet market in Wuhan, China, that was initially identified as the source of the outbreak. One thing is certain: for a month, the novel coronavirus was allowed to spread unhindered, seeping into China’s towns and cities and laying the foundations for a global public health emergency.

Since then, COVID-19 has spread far beyond China’s borders. At the time of writing, more than 253,085 people have been infected worldwide and around 10,406 have died. Japan has closed all of its schools to prevent the virus from spreading, while Italy, France and Spain have gone into lockdown. Other countries around the world warn they will have to take similar measures.

“If some do not do everything that is needed, this can still become out of control, with dramatic consequences in global health and the global economy,” UN Secretary-General António Guterres told reporters during a visit to the World Health Organisation’s (WHO’s) centre for managing emergencies on February 24.

With China so integrated into the world’s supply chains, COVID-19’s impact on businesses has been sprawling and indiscriminate

As a result of the outbreak, the OECD warned on March 1 that global growth could halve this year compared to its previous forecast. Meanwhile, Oxford Economics, a global forecasting and quantitative analysis company, estimated that the virus could cost the global economy $1.1trn in lost income in 2020. COVID-19 has made it painfully clear that pandemics not only pose a huge risk to human life, but to the economy, too.

Fits and starts
In the event of an outbreak, there is a heavy price to be paid for silence. In 2003, it took China about four months to announce the emergence of severe acute respiratory syndrome (SARS), another coronavirus, to the public. According to one estimate, China’s economy slowed by around one to two percentage points that year due to the outbreak and its mishandling.

SARS caught China off guard. Since then, Beijing has improved its healthcare surveillance systems, establishing the China Information System for Disease Control and Prevention, which connects hospitals and clinics, and reports outbreaks in real time. Despite what it recognised as “shortcomings and deficiencies” in its response to COVID-19 (a rare admission of guilt from the Politburo Standing Committee), China has responded relatively well to the outbreak, sequencing and sharing the coronavirus’ genomic data in just 10 days.

It has also implemented the biggest quarantine in history: approximately 45 million people are now on lockdown across 16 Chinese cities. Photographs of Wuhan show empty roads, dormant airports and eerily quiet subway carriages. These images speak volumes about what’s happened to business activity and consumer spending in the region. “The epidemic and associated containment measures create both a demand and supply shock to the Chinese economy,” Francoise Huang, Senior Economist for Asia-Pacific at Euler Hermes, told World Finance. “On the demand side, consumer spending was hit at a usually busy period – the Lunar New Year holidays – putting pressure on the tourism, entertainment and retail sectors.”

Chinese businesses have been hit hard by the quarantine. In February, China’s manufacturing Purchasing Managers’ Index slowed to an all-time low of 35.7, with factory activity contracting at its fastest ever pace. The country’s service sector also witnessed the sharpest activity decline in its history.

Hong Kong International Airport on February 14, 2020. The COVID-19 pandemic has left many streets, subways and airports eerily quiet, with many countries imposing travel restrictions

Under lock and Xi
The quarantine is one of the oldest defences we have against the spread of infectious diseases. It was first used as a protective measure during the 1300s plague pandemic. As the Black Death raged through Europe, city-states imposed sanitary cordons at access points. In Venice, authorities took special precautions against maritime travellers and traders – if a ship was suspected of carrying the bubonic plague, its captain was taken by lifeboat to the health magistrate’s office and kept in an enclosure where they would relay information about the health of the crew through a window. If the magistrate concluded the disease had snuck aboard, the captain and crew were taken to a quarantine centre where they’d spend the next 40 days. There was no medical treatment for the bubonic plague; it was simply a case of waiting to see if they survived.

When the WHO declared COVID-19 a worldwide emergency, it specified there was no need for measures that “unnecessarily interfere with international travel and trade”. Although this may seem like bad advice, public health experts have several reasons to be wary of quarantines and travel bans. For one thing, many consider quarantines to be an inhumane, medieval practice. Almost invariably, uninfected people under quarantine have a higher risk of catching the disease. This was evident when the Diamond Princess cruise ship was placed under quarantine after someone on board tested positive for COVID-19. When it eventually docked, more than 700 people had caught the virus.

Second, as China’s current financial data suggests, the necessity of quarantines and travel bans is a question of huge economic significance. In the 14th century, a travel ban would have had a negligible impact on the economy; today, the global travel industry is worth an estimated $5.7trn and supports roughly one in 10 jobs worldwide. Further, many believe that travel bans are futile. In an interview with Wired, several public health experts – including Georgetown University’s Lawrence Gostin and Johns Hopkins Centre for Health Security’s Jennifer Nuzzo – observed that travel bans did nothing to control the spread of the influenza virus H1N1 in 2009. This is possibly due to unwitting individuals transporting the virus across the globe before the travel ban was implemented.

The sheer scale of the COVID-19 outbreak, however, may warrant aggressive measures, such as China’s quarantine. In the space of two weeks in February, the number of confirmed cases in the country dropped by more than 80 percent as China cracked down on controlling the spread. That said, some experts question whether these statistics are subject to political influence – one of President Xi Jinping’s most pressing aims is to restart the Chinese economy, and quelling panic would certainly help him achieve this.

Unhealthy profits
When SARS struck 17 years ago, China’s share of global GDP was just six percent; today, it’s closer to 17 (see Fig 1). As a result of this considerable increase, any economic shock to China – like that brought on by COVID-19 – is unlikely to stay within the country’s borders for long.

In an International Finance Discussion Paper, Federal Reserve researchers studied what a ‘hard landing’ – a combination of financial stress and a sharp fall in GDP – in China would mean for the rest of the world. It predicted there would be “consequential spillovers to the US and the global economy through both real trade links and financial channels”. With China so integrated into the world’s supply chains, COVID-19’s impact on businesses has been sprawling and indiscriminate. Those affected range from US tech giants to Thai shopping malls and Australian lobster-catchers.

According to data from the UN Conference on Trade and Development (UNCTAD), China is the world’s largest exporter of electronic components (see Fig 2). “A UK manufacturer who imports a certain component or material from abroad might not know the origin of that component – it could easily be from China,” Alejandro Alvarez, Partner of Operations Performance at Ayming, a consultancy specialising in supply chain and operations performance, said in a statement. In fact, Apple warned on February 17 that it was unlikely to meet its quarterly sales guidance in March due to coronavirus-driven production problems in China.

COVID-19 has confirmed what many public health officials already knew: most countries are woefully unprepared to tackle a pandemic

Some countries are particularly vulnerable to this supply chain disruption. In Asia’s emerging economies, more than one third of manufactured goods imports originate in China, according to the Financial Times. As Huang explained to World Finance, the countries most integrated with Chinese value chains are Taiwan and South Korea. South Korea has announced a $356m emergency plan to offer loans to companies that are struggling in the face of a virus-related economic slowdown.

Regardless of where a disease first emerges, some sectors are almost certain to suffer – namely, luxury goods and travel. China has a strong foothold in both of these industries, with McKinsey & Company reporting that Chinese customers accounted for one third of global spending in the luxury goods market in 2018. According to figures from AllianceBernstein and Boston Consulting Group, luxury brands could suffer a $33bn to $43bn hit this year due to reduced demand.

However, there are some industries that – morbidly – stand to gain from the spread of COVID-19. In the immediate aftermath of the outbreak, as stocks of travel-related and luxury goods companies fell, Chinese drugmakers and face mask producers outperformed. Between December 30 and January 13, the most popular face mask brand in China, 3M, gained $1.67bn in market value.

Another industry enjoying an unexpected boost is e-commerce. In Singapore, RedMart reported that online food orders had surged 300 percent in the wake of the coronavirus outbreak. Similarly, Alibaba Group CEO Daniel Zhang said COVID-19 had sparked “explosive growth” in the company’s chat, videoconferencing and task management tool, DingTalk, as more Chinese people opted to work from home.

Spreading panic
So far, what we know about COVID-19 suggests that it could travel much further and faster than other diseases that have recently made headlines, but with less-immediate consequences. According to the WHO, the fatality rate of Ebola is about 50 percent – people who contract it become severely ill and often die within the space of two weeks. This makes it relatively easy to diagnose and contain. By comparison, the mortality rate of COVID-19 is thought to be around three percent. The majority of people who get it won’t become severely ill and won’t die. What’s more, a person with Ebola can’t spread the virus until they develop symptoms – with COVID-19, they can. It’s difficult for someone not to pass on a highly contagious disease if they have no idea they’re infected.

Consequently, some analysts think containment is now impossible. According to James Hamblin, a writer for The Atlantic, many epidemiologists believe that COVID-19 could become a new seasonal flu and that “cold and flu season” may soon become “cold, flu and COVID-19 season”. Hundreds of thousands will potentially die from the disease every year, but the same is true of the flu. Although it may become a major public health burden, it is unlikely to kill huge swathes of the global population in one go.

As COVID-19 continues to dominate headlines, it’s easy for individuals to convince themselves that the threat to their life is serious and immediate. In a survey of 705 people in Hong Kong conducted at the height of the SARS epidemic, 23 percent of respondents feared they were likely to become infected with SARS. The real risk of infection was just a fraction of that, sitting at 0.0026 percent.

In the case of COVID-19, social media has played a key role in amplifying paranoia. “The days are largely gone when the only response to disease threats was a public health response to information exchanged between governments,” Charles Perrings, Co-Director of the School of Life Sciences Ecoservices Group at Arizona State University, told World Finance. “That is still there, but now it is complicated by the fact that individuals and firms are also responding to information shared through social media and the internet.” Put simply, social media hastens the spread of panic and misinformation around a virus, causing the global economy to haemorrhage money – according to Markets Insider, the S&P 500 lost 11 percent of its value over five days at the end of February, its worst weekly drop since the 2008 financial crisis (see Fig 3).

A perceived threat can often have a bigger economic impact than the virus itself. Even before it had confirmed its first case of COVID-19, Australia experienced a wave of panic-buying that left supermarket shelves empty. During an outbreak of H1N1 in Mexico, the mere perception of risk had negative repercussions for the economy: air travel to and from Mexico decreased by 40 percent and exports of pork declined dramatically, leaving the country with a pork deficit of $27m by the end of 2009. Similarly, when Peru disclosed an outbreak of cholera in 1991, its South American neighbours imposed bans on Peruvian food products. The subsequent $700m loss in exports ultimately exceeded the health and productivity costs of the epidemic.

Social media hastens the spread of panic and misinformation around viruses such as COVID-19 and SARS, causing the global economy to haemorrhage money

Prevention is better than cure
COVID-19 has confirmed what many public health officials already knew: most countries are woefully unprepared to tackle a pandemic. In fact, the Global Health Security Index concluded in 2019 that no country was fully prepared for a sudden outbreak. Financing efforts against infectious diseases is one of the major challenges.

In 2017, the World Bank seemed to take a big step towards overcoming this issue when it launched the world’s first pandemic financing mechanism, the Pandemic Emergency Financing Facility (PEF). Through the PEF, investors would cover developing countries against the risk of pandemic outbreaks. But Felix Stein, a senior research fellow at the Usher Institute of the University of Edinburgh and an expert in infectious disease response, believes the PEF is deeply flawed: “The public sector institutions paying for these bonds have a lower cost of capital than the private sector investors. So the public sector should just front its own money rather than paying private investors to do that, as that cost of capital will always be reflected in the coupons.”

As well as lacking in cost-effectiveness, the PEF is a complicated mechanism. “Investors and the global health community are currently having a hard time guessing at whether it will pay out for the coronavirus because the payout modalities – including decisions over when and to whom payments are made – are so complex,” Stein told World Finance.

In 2016, the Commission on a Global Health Risk Framework for the Future stated that committing $4.5bn every year to tackling pandemics would make the world much more resilient. This may seem like a huge expenditure, but considering the World Economic Forum pegs the annual cost of a pandemic at $570bn, it’s highly cost-effective. The real problem is ensuring the money is spent in the right way.

The lack of sanitation and health surveillance in one country isn’t an isolated problem – it’s a health risk to the world

“What the coronavirus shows is that pandemic preparedness is not first and foremost financial in nature,” Stein said. “When we look at the living conditions of the people most vulnerable to infectious disease around the globe, the first thing that comes to mind is not that they need insurance. People at risk need health systems that can spot and treat infectious disease, as well as [provide] access to clean water, sanitation and correct information about how to protect themselves.”

The meat industry is one area where greater hygiene and health surveillance is urgently needed around the world. In China’s wildlife markets, where COVID-19 is reported to have emerged, snakes, civet cats and wolf cubs are kept together in cramped conditions, facilitating the rapid exchange of viruses from one species to another.

The risk of viral exchanges between animals and humans – known as a ‘zoonotic spark’ – is rising around the world, and growing demand for meat is one of the principal causes. High levels of zoonotic spark have been found in West and Central Africa, as well as South and South-East Asia, where livestock rearing is rapidly intensifying. Zoonotic diseases tend to be the most threatening to humans, as we have no prior immunity to them and globalisation makes them very difficult to contain.

“The effect of air travel on the spread of human infectious diseases is very well documented, but we also see the same relation between trade and the spread of animal and plant diseases,” Perrings told World Finance. “The number of new pests and pathogens introduced in any one country goes up with both the number of trading partners it has and the volume of trade with each partner.” In short, the lack of sanitation and health surveillance in one country isn’t an isolated problem – it’s a health risk to the world. “The protection to all countries is only as good as the protection offered by the least effective country,” Perrings added. “The global nature of the problem demands a global response.”

Historically, the response to pandemics has seesawed between negligence and panic. A new infectious virus explodes onto the scene and authorities hunt desperately for a vaccine. All too often, though, the virus subsides before a vaccine is developed – in June 2004, Berna Biotech announced it had stopped trials of a SARS vaccine because it was no longer seen as a priority. The cycle then repeats itself, with research and development sidelined until the next health scare surfaces. COVID-19 is a timely reminder that prevention is far less costly to human health and the economy than the cost of leaving it all too late.

All information in this article is up to date as of March 20, 2020.