COVID-19 May Trigger Global Economic Collapse

The World Economic Forum has highlighted three concerns with the COVID-10:

  • The COVID-19 epidemic is now growing exponentially.
  • Its economic impact is already more severe than SARS or MERS.
  • The political consequences are harder to predict, but could be significant and long-lasting.

At first COVID-19 was considered just another flu. Chinese officials attempted to hide it and avoided any form of action to stop it from spreading. It wasn’t until the Chinese realized it could affect their economy that they decided to take drastic measures to contain the COVID-19 virus.

More Severe Than SARS or MERS

Already with more than SARS OR MERS, there is worry that COVID-19 has triggered the beginnings of a global recession. In addition it has also revealed global vulnerability due to the reliance on China-based manufacturing facilities. The threat is further compounded by the Chinese lack of transparency, culture of misrepresentation and putting money ahead of lives.

Whole Cities Locked UP

China locked up whole cities and blocked travel between cities. They claim to have contained the virus, but skeptics around the world believe they simply stopped reporting the true numbers. Many scientists believe that the spread of COVID-19 is greatly understated as evidenced by its pattern of spreading.

Factories Shut Down

Companies have shut down operations for fear that infected employees may spread the virus to the rest of their workforce. This has led to shut-down of other factories and industries that rely on the output of those factories. The impact outside China was first felt in Japan.

Meanwhile, events and large gatherings are being canceled around the world. Consequently, the money that would have been spent on transportation, accommodation, meals, entertainment and admission for these events will not flow. Even international sporting events are being canceled. North American sports leagues are looking at having their games without live audiences and reduced physical contact to avoid the spread of the virus.

Travel industry companies are being hit hard as reflected in airline and cruise ship stock prices. Not only are they facing a reduction in sales, but they have increased expenses associated with managing quarantines and sanitizing their vessels.

Stealth Infections and Infection Waves

The challenge with COVID-19 is that individuals may not any symptoms for up to 12 days after infection. Meanwhile, they continue to spread the virus. By the time they are diagnosed, they may have already spread it to hundreds of people.

This pattern results in waves of accelerated outbreaks. It is also the reason that many believe that China is misrepresenting their numbers. According to their pattern, they should be in their third wave of spread, but that’s not what their numbers are showing. It is also unlikely that once tens of thousands of individuals are infected that the virus can be contained. It becomes especially doubtful given the Chinese culture and tendency to look for ways around attempts to restrict their behaviour.\

Mortality Rate

One Canadian doctor stated on television that he though the mortality rate for COVID-19 is about 1.5%. However, with about 100,000 reported infected, we already have well over 3,000 deaths. These sort of comments and attempts to minimalize the perceived magnitude of COVID-19 are creating mistrust in the medical experts around the world.

Whether the mortality rate is 1.5%, 3%, 5% the impact will still be negative on the world economy. What effect would 1.5% drop in demand and spending have on production, jobs, debt, etc.? Then there is the shut-down of production. If cars or electronics are not being sold, the companies don’t have revenues.

Depending on how long this lasts, many companies may experience a Net Loss for the year. If this is the case, Stock prices will fall, RRSP and investment portfolios will drop in value, dividends may be affected. This would pretty much be a recession.

Governments Closing Boarders

To avoid unnecessary deaths and protect their industries, some of the more pre-cautious countries have closed their boarders to travelers from highly infected countries. Even cruise ships have been quarantined to avoid spread of infection. These are responsible attempts to attempt to stop COVID-19 from entering their country.

Canadian Government Not Banning Travelers

Prime Minister Justin Trudeau straight out stated that Canada is not banning travelers from any countries. Meanwhile, several travelers from infection regions (such as Iran and China) have found infected. Some even had the symptoms before entering Canada and still traveled on planes to get here. Now, COVID-19 is spreading across Canada and we don’t know what wave of infection is in the works.

Geopolitics

Meanwhile, the drop in price of oil has impacted an already hurting western Canada. Oil exporting countries around the world are scrambling to come up with a plan to deal with the shortfall in cash flow. Even governments, such as Canada, which partly rely on taxation of oil production and exports will likely experience increased budget deficit.

The danger is that if a country is already in deficit and now has reduced tax revenue, its deficit will increase. With record level tax rates, there isn’t much room to increase tax revenues from increasing rates. Canada has already lost some of its most productive wealthy individuals because of our tax rates. This could cause more companies and individuals leave with their resources that are necessary for job creation and economic sustainability.

Ironically, over the last decade, some Asian countries have been attracting the new generation of e-commerce and internet entrepreneurs. It will be interesting to see how this is affected by the situation. Already, there are indications of countries collaborating in dealing with the economic threat of COVID-19.

The question left in my mind is how can Trudeau’s philosophy of ‘the numbers will take care of themselves’ fare in an environment of global recession?

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