Coronavirus could be the global shock that economists have feared: Don Pittis - Action News
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Coronavirus could be the global shock that economists have feared: Don Pittis

The coronavirus will certainly cut the GDP of China, where it originated. But will that be the kind of shock that economists have warned could derail the Canadian and world economies?

But avoiding panic over the disease's economic impact will prevent a worse result

Tedros Adhanom Ghebreyesus, director general of the World Health Organization, warns that new cases in patients who had not been to China 'may be the spark that begins a bigger fire.' (Salvatore Di Nolfi/Keystone via The Associated Press)

For thosewho worry about the world's wealth and wellbeing, the term "economic shock" has a special meaning.

As defined by people like the Bank of Canada's governor Stephen Poloz, while economies are always in a state of flux, occasionally an outside force, usuallyunforeseeable, or at least unexpected, will sweep in and put everything awry.

It seems increasingly certain that the outbreak of coronavirusspreading from Wuhan, China, is such an unanticipated disturbance to the global, the North American and Canadian economies. And yesterday Canada's finance minister Bill Morneausaid Canada would inevitably be affected.

Rising toll

As the death toll mostly in China passes 1,000, the business press has begun to tally the effects on the country's gross domestic product and estimate what impact that will have on the wider global economy.

There is so much unknown about the virus and its potential that the numbers can only be educated guesses, but experts interviewed by credible sources such as the Financial Times and the Wall Street Journal offer estimates that China's GDP growth will fall by two or more percentage points. That wouldrepresent a decline in growth of more than one-third.

Tourists take a picture in under the northern lights in the winter
A decline in global tourism caused by the coronavirus is contributing to a lower demand for oil. (Aurora Holiday/Facebook)

Many of those calculations are based on extrapolating from the economic impact of SARS, which killed nearly 800 people during its eight-month run 17 years ago. The fact that the new, relatedvirus has killed more people in only three months is only one of the many differences.

For one thing, the Chinese economy is much bigger than it was in 2002 when the SARS outbreak began. TheInternational Monetary Fundestimates that in 2020 that economyrepresents nearly 17 percent of global activity compared to around fourper cent in the era of SARS. Thus the globalcoronavirus effect will be much larger.

Just in time

In an integrated global economy operating on the strategy of just-in-timedelivery, shortages of key parts caused by the shutdown of Chinese factorieshave already stopped industrial production in the automotive and technology manufacturing sectors.

As the world discovered during the Fukushima nuclear disaster in 2011, finding replacement parts when specialized factories go down can be impossible in the short term.

Tourism has already taken a hit as big-spending Chinese tourists stay homeand, as Morneau said yesterday in Calgary,the outbreakhas already hit the Canadian oil business. And such spreading effects are insidious.From Nova Scotia there are reports that lobster prices are down 20 per cent due to the collapse of the crucial Chinese market.

The U.S. dollar is rising against other world currencies, leading to a potential slowdown in exports in a presidential election year. (Dado Ruvic/Reuters)

The U.S. economy that Canada depends upon is also feeling the effects in its currency as its dollar surges, making its products more expensive in overseas markets. The virus has pushed down the price of coffee and mortgages.

In the past the Bank of Canada governor has warned that economies can be like a cracked tree waiting for a shock to blow it down.

"Macroeconomic shocks happen all the time and economies adjust to them," Poloz once said in a briefing describing the hazards of an uncertain world. But a shock that is big enough or sudden enoughcan reveal hidden cracks in an economy.

Magnified impact

"If significant vulnerabilities are present, the effects of those shocks on the economy and the financial system can be magnified," said Poloz.

And that is the danger here. The Canadian oil business, already suffering, may be shocked into a new perilous state as cheaper producers hog a bigger share of shrinking world demand.

A global economy already close to recessionmay be pushed over the line.

Places like Europe, already glutted with monetary stimulus, may demand more with uncertain results. Already China has delayedattempts to get borrowing under control, cutting rates to boost the sickened economy.

And the shock may not be over. As we learn more about the new coronavirus, we are learning how much we don't know.

Tedros Adhanom Ghebreyesus, head of the World Health Organization, warned that cases in France and the United Kingdom with no known contact history withexisting outbreaks may show our understanding of transmission is flawed.

The death of Li Wenliang, the 35-year-old doctor who issued an early warning about the coronavirus outbreak before it was officially recognized, may show China has not been as forthright as it has claimed. (Reuters)

"The detection of this small number of cases may be the spark that begins a bigger fire," he said.

There are worries about what will happen if that bigger fire begins to break out in places that do not have Canadian-style medical facilities such as North Korea that shares a large border with China, or places in Africa where Chinese business travellers continued to visit after the outbreak but before China threw up its cordon sanitaire.

Preparation, not panic

Certainly the fact that Wuhan authorities tried to suppressLi Wenliang, the doctor who tried to warn authorities of the dangers before dying himself of the virus, does not reassure us that China has been as forthright as it claims. The age of some high-profile victims, including Li who was 35, does not support what we have been told so far.

As well as warning of the coronavirusimpact on Canada's economy yesterday, Morneau hinted that there may be more news to come and that we must be "prepared for any eventualities."

Part of those preparations must be to keep money flowing toCanada's medical system that learned so much during the SARSoutbreak, including funding Canadian research, which will be money well spent whether or not this virus spreads in Canada.

"Globally, volatility remains a key risk and obviously that has been illustrated vividly over the last couple of months," Morneau told the Calgary gathering of the Economic Club of Canada.

And whether he was referring to the coronavirus, its impact on the global economy or the Alberta oil industry, the finance minister said that Canada must have the economic resiliency to face the unexpected.

"Challenges," he said, "that we many not be able to see right now."

Follow Donon Twitter @don_pittis