Last week, the stock market plunged as a result of the coronavirus. Typically, viruses only affect humans. But the implications of having a global pandemic have consequences on more than just people. According to the Harvard Business Review, business leaders are trying to figure out whether or not it is possible if this outbreak will cause a global recession. How these individuals are doing this is through carefully looking at market signals across asset classes, the history of epidemics and stocks, as well as recession and recovery patterns.
When the outbreak first started, it was thought that it would only have negative consequences on China. But considering China’s large population, travel and the amount of trade that occurs between China and the rest of the world, it makes sense a global financial crisis is plausible.
Additionally, the New York Times states, “When people pull back from interacting with others because of their fear of disease, the things they stop doing will frequently affect much bigger industries in the United States.”
An example of this is going to the gym. According to the same New York Times article, 60 million Americans spend around 19 billion dollars on gyms a year. If individuals stopped attending these facilities to due fear of the current outbreak, this would slow economic stimulation.
Furthermore, a study conducted by the World Bank found that a severe pandemic could cause an economic loss equivalent to around 5 percent of global GDP. That is over three trillion dollars in losses. This can be compared to the 2009 flu pandemic which caused a 0.05 percent loss in global GDP.
Despite this, William Reinsch, the former president of the National Foreign Trade Council and senior advisor at the Center for Strategic and International Studies claims that “As long as factory closures don’t lead to job losses, by this time next year the level of GDP is unlikely to be very different from what it would have been without the virus.”
And considering China is easily able to quarantine certain areas of the region, it is likely that the virus will not spread as drastically as individuals think it is. This will ensure factories don’t close, which will help to maintain the global GDP.
Ultimately, the sudden stock market shift was most likely a fear-based response from corporations and company stakeholders. As long as governments are able to contain the coronavirus, it is unlikely to cause irreparable damage to the economy. Until then, remember to wash your hands for a full 20 seconds and bring Lysol wipes wherever you go!
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