By John Ross
Two huge coronavirus shocks
The coronavirus is literally a life and death issue for millions of people – this is why it is totally dominating mass attention and the media. It has also simultaneously produced a gigantic global economic shock. It is impossible to separate these two issues because the coronavirus’s impact on the global economy depends on whether it can be brought under control and how fast.
It is crucial to understand that we are only seeing the beginning of this crisis – the coronavirus’s impact is only going to deepen in the West. This is due to the fact that the coronavirus crisis in Europe and the US is now far worse than at the worst period in China and so far is continuing to worsen. Indeed, the failure of the capitalist countries to control the virus has produced a disaster – the only question is whether it will now worsen to create a catastrophe.
Taking first the least important of the two aspects of health and the economy, the economic one, the coronavirus is unusual in being simultaneously a supply side and a demand side shock. The supply side shock is that the health risk means the work force cannot produce normally, causing huge falls in output. The demand side effect is that significant numbers of services and goods, if they are not consumed in the short term, will not be purchased at all – people will not travel to work twice to make up for when they did not go to work, they will not have twice as many meals in restaurants etc.
This was reflected in the huge falls in output in China in January-February, as the country basically shut down its economy to the level necessary to contain the spread of the virus, and to safeguard China’s people from it. The decline of China’s industrial production compared to the year before of 13.5% in January-February, the fall of 20.5% in retail sales, and the 25.5% fall in fixed asset investment showed this impact.
But China’s drastic economic action was entirely justified in the more important human terms as the coronavirus was decisively brought under control. In only five weeks and two days from the peak level of daily infections, that is between 5 February and 13 March, the number of daily new cases in China was reduced from 3,887 to 8 – that is by 99.8%. This shows that decisive action, giving a total priority to safeguarding people’s health, can control the virus.
By 15 March only 0.006% of China’s population had been infected with coronavirus. This rapid reduction of the spread of the coronavirus, in a matter of weeks, and with only a very small part of the population infected, is in total contrast to the British government projecting that the outbreak may last for very many months to the end of the year, that people over the age of 70 must prepare for four months of self-isolation, and that 60% of the population need to become infected to achieve ‘herd immunity.’
The coronavirus situation in the West is far worse than in China
But the economic impact in the West, seen immediately in the huge stock market falls but which will rapidly spread into the productive economy, was not due to China’s coronavirus situation but to the coronavirus situation in the West – which is now far worse than anything seen in the worst period in China.
That the global economic impact is being driven by the coronavirus crisis in the West, not in China, is clearly shown by the fact that during January-February, the worst coronavirus period in China, US stock markets were still soaring – the Dow Jones Industrial Average’s all-time peak was on 12 February when the coronavirus was raging in China with 2,015 new cases that day. The recent most severe Western stock market fall in contrast, on 9 March, came when the coronavirus was coming under control in China – the number of new cases in China on that day was only 40.
In terms of the global situation, sharp declines in the number of new coronavirus cases in China confirm that the coronavirus outbreak there, while not over, was decisively being brought under control. Therefore, production and supply chains both in China, and from China to the global economy, would begin to improve.
But despite the sharp improvement of the situation in China the huge fall in the Western stock markets was entirely rational because they reflected a correct understanding that the place the coronavirus is presently out of control is not China but in the West. Indeed, it is crucial to factually understand that the speed of spread of the virus in key Western countries is now very much faster than at the worst period in China. This reality is merely obscured by making comparisons in terms of the absolute number of cases, because China’s population is so much larger than any capitalist country except India.
For example, attempts have been made to hold up success in South Korea in controlling the virus as equivalent to China’s. But this is factually not nearly the case. Mainland China’s worst day for the number of new laboratory confirmed coronavirus cases was on 5 February at 3,887. The worst day in South Korea was on 29 April at 813. But to assess the relative impact of the coronavirus on a country this comparison in terms of absolute numbers is highly misleading for the simple reason that Mainland China’s population is more than 27 times that of South Korea. Therefore 813 cases in South Korea, in proportion to its population, is equivalent to 21,993 in Mainland China. The relative size of the peak number of new cases in South Korea was more than five and a half times as high as in China. Furthermore, by 15 March there were still 76 new cases reported in South Korea which is equivalent to 2,056 in proportion to the population of China – on that day in China there were only 20 cases. Therefore, South Korea has made welcome progress compared to European countries, but its success is far less that in China – the number of new cases in South Korea on 15 March, relative to its population, was a hundred times higher than in China.
The situation in Europe is now disastrously worsening when measured in relative terms – which gauges the real impact of the virus. China’s population is 17 times Germany’s, 21 times Britain’s and the north of Ireland’s, and 23 times Italy’s. Recalling that the highest number of new coronaviruses cases in China on a single day was 3,887, the number of new daily cases reported by the WHO on 15 March in Germany (733) was over 12,000 relative to China’s population, the number of new cases in France (829) was equivalent to almost 18,000 relative to China’s population, the number of new cases in Spain (1,522) was equivalent to almost 46,000 relative to China’s population, and the number of new cases in Italy (3,497) was equivalent to almost 82,000 relative to China’s population. So, in proportion to the population, the number of new daily cases in Germany was three times as high as the peak in China, in France five times as high, in Spain 12 times as high, and in Italy 21 times as high.
The relative impact of the coronavirus is therefore already very much worse in Europe than at the most severe period in China. Furthermore, the number of European cases is rising. While China is bringing the coronavirus under control, failure of the European capitalist countries to take similar measures to China has led to the virus spreading extremely rapidly.
Economic and market impact
The global economic impact follows inevitably from this failure in the West to contain the virus. Europe is the world’s largest economic area – taken together even bigger than the US. Therefore, the fact that the relative speed of spread of the coronavirus in Europe is far faster than at the worst period in China has a very severe impact on the world economy. This by itself inevitably has a harsh effect on Western stock markets and economies. This negative economic shock then also explains the plunging oil price and the oil production war waged by Saudi Arabia, Russia etc. The oil price shock then worsened the stock market falls through the crash in energy company share prices.
The situation in the US is perhaps two weeks behind Europe – although this is difficult to judge precisely as the US authorities are taking a dangerous approach of minimising the virus’s danger. Trump initially tweeted that the coronavirus is a less serious risk than ordinary influenza. As is widely understood a similarly reckless policy is being adopted by the British government.
The US appears in key cases to either have a totally inadequate number of virus test kits or may be taking the criminal decision not to test – a policy now being adopted by the British government. For example, to take the worst case, the Washington State nursing home which suffered the most severe outbreak in the US, with 19 suspected deaths, waited days before receiving kits to test others – which revealed another 31 cases. A patient must pay over $3,000 for a coronavirus test in the US so many without medical insurance will not take tests.
There are also extreme disparities between US data and that which is being supplied to the WHO, greatly understating the coronavirus’s spread in the US – presumably this data is supplied by the US authorities. For example on 9 March the official data published by the WHO, doubtless US supplied, showed only 213 US cases while the very reputable Johns Hopkins University, which has collated reports, already found 761 US cases – more than three times as high as the figures supplied by the US to the WHO. This disparity between data supplied to the WHO by the US and studies by reputable institutions in the US is continuing.
In Europe, apart from Britain, the authorities appear to be keeping serious records, but as already noted these reveal that the spread of the virus in key countries is proportionately more rapid than at the worst period in China. It is unclear if the US situation represents severe lack of preparation in light of two months warning of the arrival of the virus, organisational chaos, or the administration’s severe underestimation of the seriousness of the virus or deliberate measures to under report cases for reasons such as aiding the stock market.
The British government’s decision not to test all cases is clearly a deliberate policy to attempt to try to keep the number of reported cases down. This is criminal irresponsibility – without testing the spread of the virus cannot be traced and those who do recover from symptoms have no idea whether they really had the coronavirus or not. This furthermore means that the most immune group, those who have had the virus and have recovered, do not know that they are the best people to help the most vulnerable as they have never been tested.
In summary, in addition to the direct health impact, the severe stock market falls came when China was overcoming the virus but was because an extremely serious situation was revealed in Europe and great lack of clarity in the US – the stock market crash, logically, was due to the coronavirus situation not in China but in the West.
The economic perspective depends on the medical policy
It is impossible to precisely estimate the precise depth of the economic downturn, although it will be sharp, without knowing whether the coronavirus can be brought under control in the West. While emergency measures in slashing interest rates and undertaking Quantitative Easing are being taken by the US Federal Reserve, other central banks, and capitalist governments, many measures cannot be taken while the health emergency continues. People will not go to shop, to restaurants, to travel for holidays etc, whatever the economic inducements, if they think they may die as a result. Many economic recovery measures therefore can only be taken when the medical situation is ended.
As China is getting the coronavirus under control it can already begin to prepare economic recovery measures. But until capitalist Europe is prepared to take the decisive measures to control the coronavirus, similar to those used in China, the medical situation will continue to deteriorate, and it cannot launch any effective economic recovery measures. Simultaneously the medical situation in the US remains entirely unclear due to the entirely wrong approach taken at the beginning of the outbreak by the Trump administration. The World Health Organisation has explained the situation clearly in a virtually unveiled attack on the policy of the British and US governments: ‘The most effective way to prevent infections and save lives is breaking the chains of transmission. And to do that, you must test and isolate. You cannot fight the fire blindfolded. And we cannot stop this pandemic, if we don’t know who is infected. We have a simple message for all countries Test, test, test. Test every suspected case.’
The background in the Western economies when the coronavirus hit was clear. Their economic situation was weakening since the peak of the current US and EU business cycles in the second quarter of 2018. From then until the 4th quarter of 2018 US GDP growth had fallen from 3.2% to 2.3%, and the EU’s from 2.5% to 1.2%. The coronavirus will clearly weaken this economic growth further – by how much depends, as already analysed, on how rapidly decisive European and US anti-coronavirus measures are taken. The UK recorded zero GDP growth in the three months to January, before the coronavirus impacted this country. Given this weakness before the coronavirus struck it will therefore be a miracle if a recession in the West is avoided.
The experience of China shows the coronavirus can be brought under control. But so far, the capitalist Western countries are not taking these measures. There is therefore already a disaster in the West due to the failure of response to the coronavirus. The only question is whether the disaster will worsen further into a catastrophe.
This is an updated version of an article from John Ross, which first appeared in Chinese in Global Times