With large swaths of China shut down and many other countries on edge, I spoke with business columnist Josh Barro about the economic misery that the coronavirus has inflicted on top of its death toll — and whether it’s about to spread Westward.
Ben: The financial damage caused by the coronavirus that has killed almost 2,000 is already considerable. China’s status as the world’s supply chain is being at least temporarily threatened; the tourism and travel industries are being battered; major companies like Apple are warning of slowdowns; international conferences and trade shows are being canceled. Yet the American stock market and other major financial indicators do not show signs of panic. Some argue that this is folly. “This will eventually end badly. I have never in my career seen anything as crazy as what’s going on right now,” Scott Minerd, global CIO of Guggenheim Investments, wrote. “The cognitive dissonance in the credit market is stunning.” Is it only a matter of time before much more serious economic fallout arrives from a disease that is hardly under control, and may continue to spread around the world?
Josh: I’m not an epidemiologist, and neither are the vast majority of the market participants who are trying to figure out the likely economic impacts of coronavirus, and neither is Minerd. But my baseline assumption in these situations is that, because there is a major financial reward for getting the analyses right and penalty for getting them wrong, the market is providing the best aggregation of the available information. Which is to say, my guess is the market’s guess: that the global financial impacts of coronavirus will ultimately be limited in scope.
“It is only a matter of time” is incorrect. It’s a matter of the spread of the disease — if there starts to be an uncontrolled spread of disease outside China, the global economic impacts will likely be major. If it’s essentially restricted to China, and if China is already starting to normalize (severe restrictions on activities remain in much of the country, but some factories are also starting to reopen) then the impacts will still be important, especially for companies that do a lot of business in China, but they shouldn’t be huge for the U.S. or for U.S. companies as a whole.
Ben: So it’s not possible, in your view, that we could see worsening economic effects as a sort of delayed reaction to what has already happened in China, given the global interconnectedness of everything in 2020?
Josh: I think that should already be priced into stocks. And some of that has happened already — Apple announced it would miss its earnings targets because of trouble in China (both China disruption affecting the global supply of iPhones and weak Chinese consumer demand), and its stock fell. So did stocks of chipmakers that supply Apple and its competitors. To some extent, there will be catch-up production that offsets temporary disruptions. If iPhone demand in Germany is unaffected by coronavirus, but production delays disrupt iPhone supply, there should be more sales later to offset fewer sales now. Of course not all the lost consumption will get made up — for example, restaurants that lose revenue because people stay home during the outbreak won’t see that offset by people eating more meals later — but part of it will and that dampens the impact.
In some ways this is analogous to the effects of the trade war. Like coronavirus, the trade war has disrupted trade with China and has been negative for U.S. firms, especially those with a lot of exposure to the China market. But the overall effect on the U.S. economy hasn’t been large, because not all China trade got shut down, some trade just shifted to other suppliers, and most of the U.S. economy is either services or production for our own domestic consumption. Similarly in this situation, disruption in China has only so much effect on our economy — so long as the disruption really remains limited to China.
Ben: But for China, presumably, this will be a serious blow.
Josh: Yeah. Part of the trouble with measuring it is that you can’t really trust Chinese government statistics, either about the economy or about public health. But yes, it is a major economic problem there, in addition to being a serious public health crisis. I was talking with Patrick Chovanec about this about two weeks ago — he said if the factory closures could really be kept to a week or two, there would be lots of the catch-up production I discussed earlier and the effects would be pretty small. But if they dragged on and on, a lot of firms would just start buying products from countries other than China. Since then, the factory reopenings have started, though they have been slower than expected. So that’s sort of an intermediate result — assuming the reopenings continue and weren’t premature. Still, the forecasts I’ve seen have the Chinese economy to continue growing, just more slowly than had been expected.
Ben: President Trump has been weirdly quiet about all this — when he has weighed in, it’s been to commend China’s response. Do you think this is because the negative economic effects he could create by sowing panic, which is his natural response, could hurt his reelection?
Josh: His administration hasn’t been wholly disciplined on this issue. Wilbur Ross said trouble in China would make it easier to bring jobs back to the U.S. But Trump wants China to buy more American products, a goal that is undermined if China’s economy is too weak to support more demand for American products. I don’t think it helps him with his strategic objectives related to China to pile on.
Ben: What would be an indicator to you that things could get a lot worse, economically speaking?
Josh: The worst possible thing would be uncontrolled transmission of the disease outside China. This would be a strong indicator that we should worry about a pandemic with major impacts on the economy (and human life) around the world. Scott Gottlieb, who until recently was the FDA commissioner, has been warning about the rising number of cases in Japan and Singapore. But it’s not yet clear whether these are likely to rise to an epidemic level there. That, I think, is the right place to watch. But again, the aggregated story from the financial markets seems to be that people are not that worried.