By Rex Nutting, MarketWatch
MIGUEL MEDINA/AFP via Getty Images
The world woke up Monday to the reality that the coronavirus epidemic is going to have a much bigger impact on the global economy than investors and policy makers had assumed. Just how big, no one really knows.
Last week, it seemed as if financial markets believed that COVID-19 would be contained. But new cases in Italy, South Korea and Iran over the weekend undermined that belief. The World Health Organization tried to reassure the public on Monday, saying the disease was not yet a pandemic because it was not spreading in an uncontained way.
No matter, stock markets /zigman2/quotes/210599024/realtime GDOW +1.61% /zigman2/quotes/210599714/realtime SPX +1.47% and other financial markets /zigman2/quotes/210673925/realtime XX:BUXX -0.64% /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -5.29% /zigman2/quotes/210034565/delayed GC00 +2.89% were quickly recalibrating the worst-case scenario, one in which hundreds of millions of people would be infected, and millions would die.
Nasty, brutish and short
Investors are just beginning to price in the possibility of a sharp and nasty global recession that would be followed by a rapid rebound once the disease has run its course. Whenever that will be.
In the longer run, of course, a pandemic could have more far-reaching effects, including a smaller and less productive workforce and even a reordering of globalization.
A pandemic ‘could produce a short-run impact on the worldwide economy similar in depth and duration to that of an average postwar recession in the United States,’ the CBO found.
We’d like to think that we can know the worst that could happen, but there is still so much that isn’t known about COVID-19, the disease caused by the new coronavirus that emerged in China and now spreading around the world. Most of the economic analysis is based on past pandemics, such as the 1918 global influenza pandemic, and more recent bouts with avian flu, SARS and MERS.
Nothing like it in recent history
But none of those examples fit the current situation perfectly. For one thing, unlike the flu, no one in the world has any natural immunity to this disease, nor is there a vaccine. The coronavirus is quite contagious, and many more people are likely to get COVID-19 than is assumed in these generic pandemic simulations.
The more recent pandemics weren’t nearly as widespread or deadly as this one seems to be. People who don’t appear to be sick can transmit the virus, making efforts to contain its spread magnitudes more difficult.
What’s more, the 1918 flu pandemic occurred in a different world, the world before airlines shrank the world, the world before globalization knitted our economies closer than ever, and the world before the internet, a technology that can spread misinformation and fear virally around the globe in an instant.
For example, the 1918 pandemic didn’t seem to have much impact on global trade or financial markets. Compare that to what we’ve already seen with COVID-19. Here’s what Apple, Procter & Gamble, Walmart and other U.S. companies are saying about the coronavirus outbreak.
That means the economic impact of a global pandemic of these proportions could be much larger than what investors and policy makers have assumed.