The talk of the town this week has certainly been the coronavirus. Foreign newspapers have actually given this item much more space and attention than local newspapers have. Even so on Tuesday we still had a spurt of panic buying which was generated not on the basis of any reliable news but on the basis of fake news and irrational impulsive behaviour.
I know less than nothing on the medical issues surrounding the coronavirus and will not venture into this direction. However, the virus is also having an economic impact, and this is what I wish to tackle.
Analysts are claiming the economic impact of the coronavirus outbreak can be severe and the rising cost for business and the world economy is expected to become clearer in the coming days, weeks and months.
What could this impact be? One could start with the travel restrictions being imposed and the significant amount of flights and holidays being cancelled worldwide. There is even talk of cancelling the Olympic Games due to be held in Japan later this year. As such, it is easy to imagine the impact this would have on tourism activity worldwide and on those economies that depend heavily on this sector.
The efforts to contain the spread of the disease through quarantine, especially in China, has disrupted supply chains for manufacturing companies, not just in China but also in other parts of the world.
Factory output is already dropping and is expected to drop further. If workers are unable to get to their place of work, that would also mean lower incomes leading to decreased consumption.
There is evidently an effort to seek to depict such a negative impact as being short-term and controllable.
The head of the International Monetary Fund, recognised as the global lender of last resort for governments, said the organisation she leads is ready to provide additional support by way of grants and debt relief.
Investors have started to fear the worst
Kristalina Georgieva also stated the IMF is assuming that the impact would be short-lived but added that the continued spread of the virus could have dire consequences. She emphasised that global cooperation is necessary to tackle the negative economic consequences if the outbreak turns out to be more widespread.
Analysts are also fearing the spread of the disease in Europe. The international media is reporting extensively what is happening in Italy. One wonders if the disease is spreading in other European countries as well, but the international media is not picking it up because no country would be too happy to admit it, again because of the negative consequences on their economy.
The issue in Europe is made worse by the fact that the eurozone economy has shown definite signs of slowing down in recent months, as a result of trade wars. The spread of the coronavirus could make matters worse.
The financial markets have also reacted very negatively in recent days. We have seen big declines in the price of equities in the US, Europe and Asia. This is certainly an indication that investors have started to fear the worst.
They are starting to see real prospects of a global economic slowdown which will not be short-lived but which could be long-lasting. This is shown by the fact that returns for very short-term debt are higher than those for longer-term debt.
When one considers all this, one starts to appreciate the cascading economic impact on the world economy of the virus. The size of this impact and its extent in terms of time remains to be seen.
What is of concern is that the current mood among the world’s political leaders is not conducive to cooperation but it is one where each will seek to pursue one’s own interests exclusively.