‘Economic contagion’: Virus in new phase

ANALYSIS

So when do we panic that the world's economic powerhouse is in lockdown?

The growth in the number of novel coronavirus cases is no longer exponential - at least if you believe official Chinese statistics. Approximately 3000 new cases are being reported each day worldwide, mostly in China, and the official death toll is now over 1000.

The virus isn't heading off the charts, but it is steadily worsening each day, as the next graph shows.

Coronavirus cases and deaths have skyrocketed. Picture: Supplied
Coronavirus cases and deaths have skyrocketed. Picture: Supplied

Should we believe Chinese official numbers? Head of the World Health Organisation (WHO) Tedros Adhanom Ghebreyesus has said the cases we've seen might be just the tip of the iceberg. Online, conspiracy theories are running wild.

Could China be covering up? The number of cases on board the Diamond Princess cruise ship is growing extremely quickly. It doubled overnight to 135. That suggests that for people in close quarters, the virus is very contagious and might make us sceptical of Chinese reports of slowing viral spread.

However if we look at the number of cases in developed countries, we can find some comfort. Australia has been reporting 15 cases for several days, with no increase. Japan has 26, Korea has 27. These numbers are not growing like wildfire. They are a reason to hope that even if China is understating the problem, it isn't by a lot.

So let's assume China is slowly making progress against the virus. That is not the end of the reasons to worry. Because it is doing so by locking down its population, and thus its economy.

The city of Wuhan, at the epicentre of the virus, is sealed off.

Subways in the major cities of Beijing and Shanghai are reported to be empty as people fear the contagion.

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Foxconn, the company that makes Apple's iPhone, had an extended shutdown and has restarted operations at a fraction of their normal level.

Burger King has 1300 stores in China, and it has shut half of them down.

Such a widespread lockdown is having a huge effect on the world's second biggest economy. The People's Bank of China - that country's equivalent of our Reserve Bank - has injected 300 billion yuan ($A64 billion) into the economy to try to stave off total collapse.

But will it be enough? The rest of the world is sealing itself off from China too.

Many airlines have cancelled flights to and from China, Australian universities are delaying the start of classes and the shipping industry is cancelling sailings to China.

The correct steps to take to reduce the spread of viral infection are exactly the steps that create economic contagion. So the economic fallout is spreading around the world.

REACTION

China's economy is now a giant. What happens there matters.

China has become an economic powerhouse. Picture: Supplied
China has become an economic powerhouse. Picture: Supplied

Or at least it should. Wall Street keeps casually hitting fresh highs. The S&P 500 index soared over 3350 yesterday for the first time in history.

ANZ Bank is predicting Australian GDP to fall in the first three months of the year. That should be big news. And yes, we have seen a strong reaction in currency markets, with the Australian dollar falling to its lowest level in over a decade - just 66.6 US cents.

But in stock markets? Nothing but good cheer. Excitement over central banks cutting rates more than overshadows fear of a pandemic.

 

Of course, individual companies with exposure to China are starting to feeling the pinch. For example, hearing implant maker Cochlear. It is an Australian company and a huge success story around the world. On Tuesday it downgraded its profit forecast (slightly) because of the coronavirus and its stock price promptly fell.

Crown Resorts also lost a big investor who withdrew a planned share purchase due to coronavirus. But beyond these individual cases, stock investors, as a group, are exuberant.

WHAT'S NEXT?

So far, the virus has not established a big foothold in countries other than China. Except for the cruise ship, the biggest outbreak outside China is in Singapore, where 43 people have fallen ill. China has 1000 times as many cases.

Why this is remains unclear. Presumably strong public health systems and travel bans are working. Hopefully the situation stays stable. But if the virus begins to spread rapidly in countries other than China, a big second wave of economic impact could hit us all. And then surely markets would start to worry.

 

Jason Murphy is an economist | @jasemurphy. He is the author of the new book Incentivology.