Brian Fallow: Counting the cost of coronavirus

It's hard enough to estimate the virus outbreak's human toll, let alone the financial cost. Photo / AP

COMMENT:

Ask an economist to predict something and you are liable to get one of two answers: "It depends" or "it's too soon to say".

Both responses are more than usually valid if the question is about the potential economy-wide impact of the new coronavirus.

There is still a level of uncertainty about two central questions: how easy is it to catch and what are the chances of dying if you do? That makes it hard to estimate how far and fast it will spread, when the epidemic will peak and what the eventual human toll will be.

Uncertainty breeds fear, amplified in the age of (anti-) social media, which triggers precautions by governments, companies and individuals and which disrupt business as usual and impose costs. Some of those costs might later be recovered but others will be permanent.

At this stage we are looking at a range of possible outcomes.

At the best case end of the spectrum — unless you live in China — is something on the scale of the Sars epidemic in 2003. The coronavirus appears to be spreading faster than Sars did but is less lethal; its "case fatality rate" appears to be lower. And so far, like Sars, it is largely confined to China.

At the other end of the range, it could be the beginning of a pandemic, where no country escapes, everyone freaks out, economies seize up and it is a global economic catastrophe. To calibrate the scale, the Spanish flu 100 years ago claimed about 50 million people, far more than the world war that preceded it, in a world much less populous and interconnected than ours.

After the Sars epidemic economists (including distinguished Australian Warwick McKibbin) had a go at estimating the economic impact and arrived at a figure of US$40 billion of global output lost.

But the impact on New Zealand, by Westpac's reckoning, was a barely perceptible 0.1 per cent of gross domestic product.

The world economy today is much bigger than in 2003, however, and China is a much bigger share of it. So the cost of a Sars-scale event would be some multiple of US$40b. McKibbin reckons three or four times.

The New Zealand, Chinese and global economies have all been growing at below-trend rates lately, so they have less momentum than they might normally have had as they encounter however much of a headwind the epidemic turns out to be.

China accounts for 19 per cent of New Zealand's two-way trade of goods and services, about four times the proportion in 2003.

The principal exports are dairy products ($4.7b in the year to September 2019) followed by meat, logs and travel services (to students as well as tourists), each around $3b.

Visitor arrivals from China had already fallen before the coronavirus outbreak, down 9 per cent in the year ended last November compared with the year before. It seems likely the impact on tourism will not be confined to the Chinese.

Others may well be wary of being cooped up with hundreds of strangers for hours in an aircraft, breathing filtered but recycled air.

If so, it would be an example of the "social distancing" behaviour associated with epidemics. International tourism, after all, is a luxury trade, and New Zealand's largest single export industry.

The coronavirus is just the latest reminder of the endless capacity of the other 99.8 per cent of the world to sideswipe the economy with a negative shock. Only a few weeks ago the focus was escalating tensions in the Gulf and the possibility of an oil shock.

Reserve Bank assistant governor Christian Hawkesby, in a speech in Sydney last week, reflected on how the bank thinks about such things.

"Our internal models suggest that a one percentage point decrease in trading partner growth typically translates to a 0.6 percentage point decrease in New Zealand's growth, and much of this occurs quite rapidly,' he said.

Reserve Bank assistant governor Christian Hawkesby. Photo / Supplied

That relationship is not an immutable law of nature, however. It may have to be re-estimated on the other side of the current event.

And as Hawkesby reminded us, trade is not the only channel through which the rest of the world can affect us. Financial market pricing is another.

Credit spreads — essentially the risk premium built into interest rates — could widen from the relatively low levels prevailing last year.

Another predictable effect when the markets switch from "risk on" to risk off" is that the kiwi dollar drops with a thud. It has fallen by about 2 per cent against the US dollar over the past fortnight.

Then there is the confidence channel. Business confidence has been distinctly soft for a while and now the coronavirus provides another reason for firms to defer investment.

Hawkesby said the Reserve Bank was monitoring the impact of the coronavirus through all three channels — trade, financial and confidence.

So far, so not so good, then.

And the foregoing all assumes — unsafely — that the epidemic does not reach our shores and take hold.

How bad might that be? In 2006, when bird flu was the focus of concern, the Treasury did some work on what the potential impact of an influenza pandemic might be for New Zealand GDP.

They considered a severe scenario in which 40 per cent of the population become infected with the virus, over an eight-week period, and 2 per cent of the infected die. That case fatality rate of 2 per cent is roughly what the Chinese authorities are reporting, though the infection rate is much less.

"On top of this we assume another 40 per cent of the workforce takes time off work due to fear of infection or to take care of others," the Treasury officials said.

"Considering as well a range of demand reductions and business closure rates, we estimate the impact of a severe pandemic in New Zealand to be in the range of a 5 to 10 per cent reduction in annual real GDP in the year of the pandemic. Over four years we estimate the cumulative reduction to be a loss of 10 to 15 per cent of one year's GDP."