MIT Expert: Overreaction Could Boost Coronavirus’s Economic Impact

One thing’s for sure about the Coronavirus which originated in Wuhan, China: nobody knows how bad it will be for human lives and the global economy. That is not stopping experts from trying to estimate that toll. Meanwhile the U.S. market seems to be bouncing back — with the S&P 500 futures up 1.3% after rising on February 3.

The human toll of the virus is increasing. By February 3, the Coronavirus had infected 17,000 people and claimed 360 lives — primarily in mainland China, according to the Wall Street Journal. By February 4, the total had risen to 20,438 confirmed cases and 420 deaths, according to the New York Timeswhich noted the good news that 632 people had recovered from the disease.

One expert — Warwick McKibbin, a professor of economics at Australian National University — estimates that the outbreak could reduce global economic growth by $160 billion — four times the $40 billion economic impact of 2003’s SARS epidemic, according to Bloomberg. This estimate is based on the quadrupling of China’s share of the global economy since 2003 — to 17% of global economic output.

On January 31 Goldman Sachs estimated that the virus to cut between 0.4 and 0.5 percentage points at an annual rate from U.S. economic output in the first quarter of 2020, “with growth rebounding in the second quarter, leaving minimal impact on full-year growth,” according to the Journal. Goldman expects the Coronavirus to reduce China’s GDP growth from 5.9% to 5.5% — while a longer outbreak could cut that growth rate to 5%.

In a February 1 interview, MIT professor Richard C. Larson said that hysteria-driven overreaction to the Coronavirus could be the biggest economic cost and that he sees too much uncertainty now to build models to predict that impact.

Global Reactions to Coronavirus

Fear of the Coronavirus and China’s integration has caused repercussions around the world. As Bloomberg wrote, “In New Zealand, a bath furnishings seller told a customer that the German-designed shower head he ordered is unavailable — because the factory in Shanghai is closed. Out in California executives of REC Group organized a supply chain war room to plan around an anticipated trucking shortage and port logjam in China. In the Middle East, Saudi Arabia is rallying support for an emergency OPEC meeting on concern oil demand will falter.”

On February 4, Macau, a gambling center, announced a two week shutdown, according to the Times. Other responses include:

  • Extended New Year holiday. Chinese-government mandated extensions of the Lunar New Year holiday in Shanghai and “key eastern manufacturing hubs.” Factory closures could threaten production plans for Apple — whose CEO Tim Cook told investors January 28 that suppliers outside Wuhan expected to reopen their factories by February 10, Tesla, and Anheuser-Busch InBev, according to the Journal
  • U.S. brands shutting down Chinese retail operations. Levi Strauss shut a a new 7,500 square feet store in Wuhan, noted Bloomberg. Apple idled operations in China where it has 10,000 direct employees until at least February 9, according to the Journal, which reported that McDonald’s and Starbucks shut down thousands of locations “to comply with government requests for people to remain off the streets.”
  • U.S. tourism to be hit. With governments enforcing regulations to block visitors from China, tourism revenue is likely to decline. Chinese visitors to the U.S. — who spend a relatively high $6,000 on hotels restaurants and shopping — account for 7% of all tourists to America. Tourism Economics expects 28% fewer Chinese visitors to the U.S. which could reduce their spending here by $5.8 billion, according to the Journal.
  • Drop in oil demand. China is the world’s biggest oil importer and Wuhan hosts two large refiners — China National Chemical and Hengli Petrochemical — which are reducing their capacity and oil purchases by 1 million barrels a day. Last week Chinese refinery use fell 15%, noted the Journal.

MIT Expert On Uncertainty And Overreaction To Coronavirus

Larson — who served as principal investigator on six years of pandemic research supported primarily by the Centers for Disease Control — said that the Coronavirus’s future trajectory is uncertain. However, he noted that this year’s U.S. influenza has taken a far greater human toll — killing “about 10,000 Americans so far and infecting over 19 million.”

Moreover, Larson believes that over-reaction to the Coronavirus could exact a higher economic toll than the progression of the disease itself. “My personal opinion is that the current hysteria in some domains (such as the selling out of face masks and terminating all flights to and from China), are over-responses,” he said. He also thinks that a big benefit of this global response could be to “reduce the incidence of this year’s seasonal flu.”

His understanding of the “physics” of the Coronavirus — its “longevity in the air and on hard surfaces and ability of the human body to fight it” — do not now appear to him to differ significantly from the flu.

While there is no way to control these physics, individual and collective changes in behavior can limit Coronavirus’s spread. Larson said this means “social distancing” — namely minimizing close contact with infected or infectious individuals, avoiding closed rooms, and self-quarantining by those who think they’ve been exposed — and “hygienic behavior changes” — e.g., “[washing] hands several times a day with the hottest water tolerable and singing happy birthday to yourself a couple of times!”

Larson thinks the number of infected people will follow a typical pattern over time. As he explained, “Usually it is initially exponentially increasing, then continues to increase in a decreasing positive slope, hits a maximum (having zero slope), and then slowly drops to zero. [The underlying chemistry and biology] of Coronavirus suggests it would follow the same pattern [as the flu virus].”

He thinks it is too early to develop a model that predicts the economic impact of the Coronavirus. “one has to know when one knows enough to create a reliable model, reliable enough for policy informing. With only very noisy data [and] limited sample sizes, available now, [I think] it is too soon to try to create a systems model of the progression of this disease.”

He suspects that the Chinese government is underreporting the number of deaths and those infected by the Coronavirus. “The first is most likely deliberate but the second is a natural consequence of under-reporting or late reporting or no reporting of mild cases,” he said.

Larson speculates that overreaction to the Coronavirus could impose its highest economic costs. “But if our response is a pendulum swinging way too far towards unwarranted hysteria, the dominant economic costs could come from our over-response and not to the progression of the disease itself,” he said.

But as Larson suggested, the societal response could have a big impact on the Coronavirus’s progression — and if the response now is an “over-response” that higher cost could turn out to be an investment that saves lives.