The latest outbreak of coronavirus has caused the biggest wave of stock market losses since 2008, wiping $5tn off share values worldwide. Markets are worried that the virus will have a serious impact on an already weak world economy. These fears are not unfounded.
The new coronavirus epidemic is having important implications for the class struggle, which we covered yesterday in an article about the outbreak in Italy. In this article we will deal with the effect the outbreak is going to have on the world economy.
COVID-19 is spreading
Since the weekend a number of new cases have been confirmed around the world. They remain small in number, but the fear is that the development of new pockets of infection will allow the virus to spread explosively.
Before the weekend, the experts were cautiously optimistic as the number of new infections was declining. In China, the number of cases between the 17th and the 24th of February increased by merely 4% (3,000). On that basis the hope was that the measures taken had been sufficient to slow the spread of the disease to a trickle. But new pockets developing in South Korea, Japan and Italy have heightened fears that these measures have been insufficient.
The long incubation period of the virus (14 days or more) and the apparent lack of symptoms in certain carriers of the virus make its spread hard to control. It seems that bearers of the virus infect on average 2.6 people, whereas with a disease like SARS (an earlier coronavirus), although deadlier, the figure was 1.3. Seasonal flu and the Swine flu epidemic have similar infection rates at just over 1. So, although the latest coronavirus is less deadly than other epidemics like SARS, it’s likely to spread much further.
The worrying thing about the latest figures is that there is now a large number of cases where people have been infected in their own country, not in China. In South Korea, more than 600 people are believed to have been infected inside the country (with another 1,100 under investigation), particularly linked to one particular religious cult. In Japan the figure is 129. In Italy the number of cases of transmission believed to have occurred inside the country is 121, but another 276 are under investigation.
The fear is that a development like that which took place in China will now take place in these other countries. However, the reality is that no one knows how bad it’s going to be. Michael Ryan, the chief of health emergencies for the World Health Organisation said that they might be able to contain the virus, or it could develop, stating:
“the virus may settle down into an endemic pattern of transmission, into a seasonal pattern or could accelerate into a full-blown global pandemic. At this point it is not possible to say which of those realities is going to happen.”
After concluding its joint mission on the 24th, the WHO was cautiously optimistic, as the figures showed the spread of the virus had been severely curtailed in China and mortality rates outside of Wuhan were considerably lower (0.7% as opposed to 3%).
Authorities are attempting by various measures to restrict the spread of the epidemic. These range from measured responses to ill-conceived panics. The quarantine of the Diamond Princess cruise ship was a disaster. It likely turned a few cases into hundreds over the course of the quarantine, given the difficulties of maintaining a high level of hygiene on a cruise ship.
The actions of the authorities in Hubei also contributed to the spread of the disease. After first attempting to hide the outbreak they announced a quarantine, but delayed its imposition by 8 hours, which prompted 300,000 people to leave the city before the quarantine began. Health professionals remain unconvinced about the measure, fearing that such a heavy-handed response will undermine public trust in authorities and place unnecessary burdens on the population.
The same measure has now been adopted by the Italian authorities, who reportedly even rerouted high-speed trains that were travelling through quarantined villages (even if they weren’t stopping). Authorities are acting in a very heavy-handed manner. One of the reasons is undoubtedly the lack of knowledge about this new virus and genuine concerns about the effects that it will have on society and the economy, but it is also quite clear that politicians are panicking. No one wants to be the one who appears not to take the matter seriously.
Lawrence Gostin, director of the O’Neill Institute for National and Global Health Law at the prestigious Georgetown University commented in the Wall Street Journal: “We’ve lurched from complacency to panic and doing things that are overbroad and not evidence-based, with massive impact on the economy.”
Self-isolation is generally considered to be the most effective measure, preventing an infected person from spreading the virus on to colleagues and other people they come across. However, it raises some serious questions. In China, the government promised to pay the wages of at least some of those affected, but such provisions are not made elsewhere.
With increasing numbers of workers around the world living paycheck to paycheck, it is unclear how they will afford such measures. This is particularly the case where the person has not been diagnosed with an illness, in which case they generally aren’t eligible for sick pay. This was highlighted in Britain after the government advised all travellers returning from affected regions to self-isolate for 14 days. The UK labour arbitration authority, ACAS, suggested employers should be supportive of such cases and allow their employees to take either sick days or annual leave. They seem to be completely oblivious to the difficulties this presents workers with.
In China, the lack of support available as well as the fear of infection has kept around 200 million migrant workers in their home towns after the end of the Chinese new year holiday. It is an unappealing prospect to return to the cities only to find yourself unable to work for 14 days whilst having to pay the higher cost of living there. The government is now attempting various incentives to bring them back to work, as their absence is causing serious difficulties in the attempts to restart the economy after the most stringent measures were lifted in China.
A blow to the world economy
The attempts to contain the virus have already begun to have an effect on the economy. The province worst affected by the epidemic, Hubei, is a link in the supply chain for car, healthcare, electronics, aerospace, defence and construction industries, but it is going to have an impact far beyond that.
Microsoft, Apple, car companies and airlines have all warned about the impact on business. Stock exchanges have seen significant drops, with the Dow Jones down to its October level. The Bank of America cut its forecast for Eurozone growth to 0.6%, from 1%. Credit Suisse has cut its forecast to 0.5% from 0.9%.
A threat to supply chains
Just in time production, which is prevalent in all branches of industry, means that stocks of parts are limited. They presuppose well-functioning global trade with reliable supplies. Now those previously reliable supply chains are being threatened.
When the SARS epidemic, which was the last significant coronavirus epidemic, broke out in 2003, China was not nearly as important to the world as it is today. At that time China was 4% of the world economy. In 2015 it was 15%. This increasing importance of China means that the impact of this new virus will be much greater on the world economy.
Monopolisation means that certain necessary components used by large numbers of brands are sometimes manufactured in only one factory. This was the case with a particular type of paint pigment for cars, which brought car production in many factories to a standstill after the plant was affected by the Fukushima nuclear plant disaster. Now, a similar process is taking place.
The car industry is likely to be hit hard because of its complexity. South Korean car manufacturers were relying on a factory in Hubei and have been forced to curtail production. European plants of Fiat Chrysler, Renault, BMW and Peugeot are threatened by the outbreak in northern Italy, because one component is being produced in one of the quarantined villages. The full impact on European production from supply-chain disruption is likely not going to be felt until next month as the shipments take about 4 or 5 weeks to arrive from China.
Industries under threat
Shipping is another industry that is in serious difficulties. Last year was a bad year for global trade, with the first year of contraction of global trade volume since 2009, largely because of Trump’s trade wars and the slowing European economy. This year was meant to be a year of recovery for shipping, with the new deal signed between the US and China, but the dislocation caused by the coronavirus is putting the future of many shipping companies in serious doubt. The biggest companies with large financial reserves will undoubtedly weather the downturn but many smaller ones will not. How many survive will depend on how long the disruption lasts.
Tourism is probably the industry that is going to be hardest hit. Chinese tourists are not only numerous but they are also comparatively big spenders. In 2018 Chinese tourists spent $277.3bn, which is 20% of total world tourism expenditure and twice as much as US tourists. With many flights to and from China cancelled and restrictions placed on arrivals from China, much of this revenue will be under threat. The first bankruptcy in Japan linked to the coronavirus, for example, was a hotel. As fear is rising around the world, people will avoid travelling and booking holidays. If the authorities fail to control the spread as holiday season arrives in the northern hemisphere, this will have a serious impact on the tourist industry around the world.
The airline industry will be hit hard as business travel, in addition to tourism, is curtailed. Many companies are now advising against any non-essential travel. An increasing number of countries find themselves on the list of countries where people are advised against anything but essential travel. Germany’s Lufthansa has already announced that it will be cutting costs. Hong Kong’s Cathay Pacific has asked its staff to take three weeks leave – without pay.
An opportunity to profit
There is always an opportunity under capitalism to profit from other people’s misery. Already the price of surgical and other protective masks has tripled in the US, leading Amazon, fearing damage to their reputation, to warn sellers that such increases are in breach of their terms. This in spite of the fact that they are not recommended for use by non-medical staff. The cost of hand sanitizer, which is recommended, has doubled.
The pharmaceutical industry of course has the upper hand in getting a slice of government handouts, but unlike during the swine flu epidemic, they have so far lacked a viable drug for treatment or vaccination. On Tuesday, their fortunes might have changed as Japan recommended the use of anti-flu drug Avigan, which caused the shares of its owner Fujifilm to jump 8.8%.
Furthermore, the collapse of a number of smaller companies will also open up opportunities for larger companies to gobble up their former competitors. The big shipping giants like Maersk and Cosco with big coffers will be looking to pick up their smaller competitors at a big discount. Like any economic crisis, the effect is going to be further concentration in the affected branches of industry.
Globalisation in reverse?
One of the reasons why it is difficult to contain the virus is the increasing interconnectedness of the world. The increased movement of business travellers and tourists across the planet raises the speed at which infections can travel across borders. This is linked, of course, to the development of world trade.
The recent trade wars of Trump as well as the increased attacks on migrants around the world means that governments are much more willing to take measures to restrict travel even if it has an impact on the world economy. This was pointed out by the Wall Street Journal earlier this week:
“Since those episodes [SARS, Ebola] support for globalization in many countries has been replaced by demands for stronger borders. Authorities have fewer compunctions about raising barriers to trade and travel in the name of disease control. The epidemic is thus one more force working to undo globalization.”
So, the raising of barriers could have more than a temporary effect. It could feed into the general rise of protectionist sentiment, which would cause further difficulties for the world economy. Over the past few decades, development of world trade has been the key to the development of the world economy. Any reversal of globalisation would mean serious difficulties for the capitalist world economy.
The coming world recession
Whether they will be able to contain the virus this coming month or it will spread more widely and cause more disruption, the economic recovery, such that it was, is coming to an end.
The German economy has now entered into technical recession as this quarter is going to follow the previous quarter with negative growth rates. Its industrial production fell 7% last year, and a recovery from that fall seems unlikely this year. Germany’s two most important trading partners are China and Italy, particularly the north of the country. The German economy is very dependent on world trade and thus vulnerable to any disruption. Now its industries will face at least two months of disruption to the supply of parts and raw materials. Difficulties in the German economy spell problems for the whole of the EU. Germany is the key economy in Europe and the consequences will be far reaching.
The US economy was already slowing down after the effects of Trump’s tax cuts were wearing off, with Goldman Sachs now predicting a mere 1.2% growth this quarter (annualised, compared to 2.1% last quarter). The Japanese economy shrank by 1.6% in the fourth quarter last year after VAT increases and a powerful storm. However, the data for this quarter now look as bad, meaning the 0.9% fall that was projected will now likely be bigger. The IMF has also downgraded Chinese growth to 5.6%, which would be its lowest level since 1990.
The world economy was already on the brink of another downturn. The virus might push it over the edge. In that sense, the virus might become the accident “behind which necessity hides itself”, as Engels put it.