The spread of COVID-19, commonly known as coronavirus, is no longer under the radar and the impact is now going beyond just health concerns. Since the initial warning issued by the Chinese government in December, the virus by March 10 had infected over 116,000 people worldwide. China’s economic growth rate is expected to slump to under 5 percent for the first quarter of 2020, financial markets have gone into a panic mode with the Dow taking a 7 percent dive on March 4, and now there are fears that a global pandemic could drive the global economy into a recession. New York State has declared a state of emergency.
Despite all this, opinions remain divided with some claiming the long-term threat to be wildly exaggerated. On the other extreme, there are those that go so far as warning about the possibility of global economic depression. Whatever the assessment may be, businesses, big or small, need to be prepared for consequences and take actions to protect their interests in the long term.
David: COVID-19 is definitely a challenge that modern society needs to wrestle with. However, it is quite a stretch to imagine that it can lead to global recession, let alone depression. Even though the fatality rate is comparatively high, it is still at 2 percent. It is definitely something that needs critical attention, but our healthcare system will adjust, and so will our lifestyles, if necessary. Even more likely, global production and supply chain will adjust. Small and midsized businesses will suffer in the short term, but larger businesses will find alternatives that will give birth to new small businesses that replace the old. There will be struggle, but talking about major recession or depression is a step too far.
Pouya: Coronavirus is definitely on the way to putting its dent into the global economy. It has clearly disrupted the global supply chain, starting with China. But that is not all. Consider how quickly it has spread from continent to continent. Wuhan alone, had over 100 million in population who were quarantined. In Iran, Italy and South Korea, not just urban communities, but also large industry sectors have been affected with full closure of businesses. In Italy, nearly the entire 60 million of its population are under travel lockdown. There does not seem to be any clear mechanism to control the spread of this disease and the fact that it spreads too rapidly, even if it is not as deadly as feared, it still can slow down the economy to a level that will be difficult to recover.
David: Maybe I am too optimistic or seem to see the glass as always half full but I not only think COVID-19 is not as big a deal as everyone makes it out to be, but that even if the predictions are true it will still be no real big deal and in any event there are some silver linings to the whole situation. I will start with the general proposition that we as humans tend to exaggerate what is happening to us at the moment as to something that is far more important in the grand scheme of things than it really is. It is called recency bias and is a well documented bias we all possess. Yes, people are sick, yes people are dying, yes it appears at the time of writing that it has slowed its spreading in China, yes cases are popping up all over the world including those where there is no apparent relation to Wuhan. My initial point is that it is not the most dangerous, widespread or lethal outbreak we have faced, so my opening position is “this too shall pass.” The frenzy of the stock market is simply a readjustment of valuations that was overdue and presents a possible buying opportunity. Businesses that are interrupted or displaced will make their systems more resilient so they will not fail in the future (what does not kill you makes you stronger) and those that go under — good riddance — you were not set up to survive and can make room for new businesses to take your place.
Pouya: I hear your point and, in all honesty, I hope you are right and this is just a frenzy. But I think there is more reason for concern than just the virus itself and that has to do with how things appear against the backdrop. The state of the global economy has been strong for an unprecedented length of time. However, there have been signals that the rate of global economic growth was slowing down. China’s economy has been struggling to keep up its double-digit growth. Even without COVID-19, some were already predicting a new recession in the forecast. The Fed has slashed interest by 0.5 percent and may even push them lower. If we were heading for a recession already, COVID-19 is certainly not the economic stimulus that we needed.
What’s been the escalating factor is that the virus has spread to some of the geographies that are instrumental to the flow of the global supply chain. The most stolid rate of growth in today’s economy, the rate that truly pulls the weight of global growth, comes from technology manufacturing, which is highly dependent on Chinese manufacturing power largely concentrated in Wuhan province. That is just one dimension of the impact we can expect. There is also the fear that the pandemic that people are unfamiliar with, or one that has an uncertain outcome, may have a bigger impact on creating a frenzy. Here, COVID-19 is seen as a silent pandemic that can spread and be contagious within hosts that are unaware of its existence for about two weeks after being affected. The administration is sending very mixed signals about how this issue is going to be tackled, and there is an immediate and observable impact that is finding its way into people’s pocketbooks and paychecks. Dow Jones has dropped significantly, and my worry is that this news may trickle down to the service sector and then to the next. But I agree with you that facts and frenzy are definitely in two different realms at this moment.
David: First of all, do not get me started on the Fed as I am an Austrian type guy. I hear everything that you are saying and will even, for argument’s sake, agree with all your points. However, we have become fat and lazy and undiversified and this has elevated the risk in the global supply and economic system. Here is my thinking: China made us a bargain 20-odd years ago which goes like this: they will provide cheap (and increasingly educated and competent) labor and open up their market of 1.3ish billion people to our companies as long as we provide them with lots of technology and business knowledge so they can move into a first world economy; we said “sure sounds like a good deal” and took it. Meanwhile the European, Japanese and our Federal Reserve flooded the market with liquidity so that, heaven forbid, we might have a recession — thereby elevating asset prices way beyond what they should reasonably be worth. I assert that this has all led to an overreliance on Chinese labor (and increasingly technology) in global supply chains and secondly an asset bubble. I maintain that a correction is long overdue to these two “facts.” COVID-19 is merely the straw that broke the camel’s back in that everyone knew these were problems but were slow/reluctant to act and a catalyst was needed. I maintain this catalyst will lead to a resolution to the first problem but fear we are so far past rational economics that a serious catalyst will lead to a larger issue in the financial system. Due to a number of factors we are seeing the diversification of the global supply chain out of China and into Southeast Asia from there to South Asia and then hopefully on to Africa. So not only no big deal but a silver lining.
Pouya: I like your take on global diversification of the supply chain. Your arguments are valid and I have no quarrel with them. This may be a catalyst to a resolution, as you pointed out. I just hope that the camel’s back is not too broken to be fixed. This is a rapidly evolving global situation which at the very least may lead to serious reexamination of the assumptions that are held with respect to strengths and vulnerabilities of the global supply chain. As diversified the global supply chain may appear, I wonder if we’ve truly diversified our channels of supply. I’m a bit skeptical, but for the sake of the economy and lives that depend on it, I hope your perspective prevails.
David Kunsch is an Associate Professor of Strategy at St. John Fisher College. Pouya Seifzadeh is an Assistant Professor of Strategy at State University of New York at Geneseo.