How the Covid-19 Epidemic Will Impact the Economy

Journal Title: The Current Digest of the Russian Press

Issue Edition: Vol. 72, No. 7

Author: Vladislav Inozemtsev


How the Covid-19 Epidemic Will Impact the Economy

By Vladislav Inozemtsev, director of the Center for Postindustrial Studies. RBC Daily, Feb. 10, 2020, p. 6. Condensed text:

The world is feverishly watching the growing Covid 19 epidemic in China, which has infected more than 30,000 people in a month and spread to dozens of countries. The panic over this little-known disease is hardly surprising. However, predictions that the illness will cause basically a new Great Depression so far do not look convincing. . . .
   
On one hand, people have learned to respond to epidemics much quicker than before. While the flu vaccine was created 20 years after the [1918] Spanish flu epidemic, a SARS vaccine was developed 21 months [after the emergence of that disease]. The transformation of health care into one of the biggest sectors of the modern economy has made it possible to greatly reduce epidemic mortality rates.
   
On the other hand, the speed and scale of reaction to outbreaks is becoming an economic problem. In 1968, [the flu pandemic] killed more than a million peple, yet it had practically no effect on global economic growth, which amounted to 6.3% that year (4.8% in the US), nor on international trade, whose volume grew by more than 6%. Today, a fatality rate of fewer than 1,000 has cardinally affected markets: Chinese stock market indices have dropped by almost 7.5% since the beginning of 2020; since Jan. 1, oil prices have fallen by 20%, while copper prices have fallen by 12% and iron ore – by more than 10%. The quarantine that was introduced in Wuhan and several other cities has affected at least 45 million people, becoming the largest such measure in history. Regions around the world are cutting back on buying Chinese goods, while countries are closing their borders to Chinese nationals and those who have recently been to China. The epidemic’s economic damage to China alone is already estimated at about $60 billion.
   
And yet, in my opinion, the global economic consequences of the epidemic will be fairly moderate. Here’s why:
   
Indeed, China may pay a high price to defeat the virus: Given that its economy will be paralyzed for at least a month, growth rates will be below 5% – i.e., 1.5% to 1.7% less than expected (in 2003 [during the SARS epidemic], losses were estimated at 1% to 1.3% of Chinese gross domestic product). This is a fairly serious blow to the global economy as well, simply because China’s share in it [since 2003] has increased from 8.2% to 19.2% (in purchasing power parity). Moreover, in the mid-2000s, the world economy showed more dynamic growth than today. From 2002 to 2007, China accounted for between 8% and 20% of global growth, but in 2019, that figure reached 39%. Obviously, the growing epidemic will leave its mark. However, even if economic growth rates fall by 1%, that is not a catastrophe – on the contrary, it could have some benefits.
   
In my opinion (and I apologize in advance for sounding so insensitive), the Covid 19 virus emerged at the best possible time in terms of the economy. The global economic boom that started in summer 2009 has already been the longest in history. Stock markets tried to adjust in late 2018, but optimism persevered. Speculators’ unbridled expectations in the last few months are increasingly cause for concern. In light of this, the slowdown of the Chinese and global economies caused by the pandemic could be beneficial if it forces investors to see the relatively random nature [of the decline]. In other words, the significant decline in economic growth for the first and second quarters of 2020 that’s inevitable in this situation will not be considered the start of a cyclical recession. Instead of starting mass sell-offs and reevaluations of strategic plans, businesses may regroup and view the events as a temporary setback instead of the start of a long-term decline. The economies of several developed countries (including France and Italy) were already in recession in the fourth quarter of 2019 and continue their steady decline. But the inevitable positive growth dynamic in the second half of 2020 after a successful fight against the epidemic could bring back growth. In other words, the Covid 19 virus, which so far lacks a vaccine, could itself become a sort of inoculation for the global economy, preventing it from overheating competely and catching an even more dangerous “infection.”