You Can’t Fight the Virus Without Harming the Economy

As with the body’s immune system, so with the defenses of the global economy. There’s a virtual cytokine storm going on: The all-out effort to battle the disease is doing more harm to global growth than the disease itself. Quarantines, travel restrictions, business closings, and citizens’ voluntary self-protection measures have frozen business while wreaking havoc on people’s routines.

This will be the business story of 2020: Can the world modulate its immune response so as to fight Covid-19 in a way that saves lives without damaging everything else we care about? Or is this a lost year?

There’s reason to worry that simultaneously defeating the virus and sustaining growth will be hard, if not impossible. New cases in China have declined sharply, which is wonderful news. But to make that happen the country’s leaders imposed the most extensive quarantine in history, corralling close to 60 million people inside Hubei province, the epicenter of the outbreak. Governments in surrounding provinces also took steps to protect their populations, enacting travel bans and forcing factories to shut down. The economic toll has been high: Growth in the first quarter will be just 1.2%, according to projections by Bloomberg Economics—the slowest year-over-year rate since China started keeping records.

Despite Beijing’s best efforts, there have been large outbreaks of Covid-19 across China as well as in South Korea, Iran, Italy, and elsewhere. And now that authorities outside of Hubei have begun easing restrictions to limit the economic pain, there’s a risk that the number of new cases in the country will begin to rise again as people go back to working, studying, and shopping. If the number of new cases in China does keep falling, it will show that an authoritarian state with a pliant population and high-tech surveillance capabilities can rein in Covid-19. But few—if any—other nations could employ China’s strategy, or would want to.

Forecasters have now turned their attention to the U.S., the only nation with a bigger economy than China’s. The question is the same: How much will Covid-19 take off U.S. growth—and how much of the harm will come from efforts to fight the disease vs. the disease itself? There were 793 reported cases and 27 deaths in the U.S. through 4 p.m. Eastern time on March 10, according to data collected by Bloomberg. That number is expected to leap.

● How vulnerable is the U.S.?

Economists who were initially blasé about the potential hit to the U.S. have become increasingly concerned. Goldman Sachs Group Inc. revised its U.S. outlook downward in late February to reflect a drop in U.S. goods exports to China, fewer tourist arrivals from China, and modest supply chain disruptions for U.S. retailers. But that turned out to be not pessimistic enough. “Over the last week the situation has proven worse than we expected,” the Goldman team wrote on March 1, citing increased economic weakness in China and further spread of the virus outside the country as key factors in the decision to downgrade full-year 2020 growth to 1.3%—a full percentage point below the previous forecast. A week later, Goldman lowered its forecast once more, to 1.2%, despite the Federal Reserve’s half-percent rate cut.

● What about the wealth effect?

The stock market’s swoon is not just a symptom of the harm the virus is inflicting on the U.S. economy, but also one of its causes. Even U.S. households that don’t directly own equities aren’t immune to the so-called wealth effect of falling stock prices. Retail sales tend to decelerate sharply in the wake of market shocks because, rightly or wrongly, many Americans view stock indexes such as the S&P 500 as the most important indicator of the health of the economy. Business confidence experiences a similar impact, which usually translates into a decline in investment. And so it’s self-fulfilling prophecy: If both U.S. consumers and companies dial down their spending because they think the outlook has worsened, then it almost certainly will.

A virus as contagious as SARS-CoV-2 is hard to tamp down as long as people continue to congregate and cough on one another. If the virus does spread widely in the U.S., a recession is likely to follow, says Moody’s Analytics Inc. Chief Economist Mark Zandi. “We could be moving from a self-reinforcing positive cycle to a self-reinforcing negative cycle,” he said on March 3.

State Street Associates, the research arm of financial giant State Street Corp., puts the chance of a U.S. recession in the next six months at 75% based on early March stock prices. Actually, a Covid-19-induced recession may already have begun. Economic historians measure recessions from the peak of economic activity to the trough, and it’s possible the U.S. economy peaked in February, when unemployment tied a 50-year low of 3.5%.

If extinguishing the virus is impossible, the next best thing is learning to live with it. Save extreme precautions for the most vulnerable, such as nursing-home residents, while dialing back economy-deadening measures in other spheres. For example, factories, offices, and schools should generally stay open, albeit with better procedures to limit contagion (hand-washing, social distancing, working from home where possible, paid sick leave). Governments can offset the economic damage with stimulative fiscal and monetary policies.

Walling off stricken cities, regions, or nations doesn’t make sense if the disease is already spreading outside the containment area. “In a globalized world, there’s a question about whether the horse may already have bolted,” says Neil Shearing, Capital Economics’ chief economist. That sounds defeatist. But given how damaging an overreactive immune system can be, it’s simply realistic.

©2020 Bloomberg L.P.