Damien Grant:
‘‘Either the Chinese government is overreacting or, more disturbingly, it is not ... If we are looking at the second scenario then we are in the early stages of a global pandemic that will cart off many souls before it burns itself out.’’
Like many readers, I’ve become immersed in the minutiae of epidemiology in the last few weeks. The problem with delving into fields beyond easy comprehension is we place emphasis on the wrong things and it can be difficult to discern between competent analysis and junk science. What I do understand is risk. My business is based on evaluating, interpreting and making financial decisions on uncertain future outcomes.
We are under-pricing the risk posed to New Zealand from the coronavirus pandemic. There are news stories about a prolonged symptom-free incubation period, the durability of the virus on surfaces and something called the RO-value that measures how many people an infected person transmits the virus to. For us lay-people this is the statistical equivalence of noise but we don’t need to understand any of it. What we do know is that Beijing’s reaction has been severe.
At the time of writing as many as 100 million people are in some form of quarantine in China, much of their economy has been placed in stasis and foreign trade has nearly ground to a halt.
Their rapidly-built hospitals look more like containment facilities than health care centres.
Locking a city’s population into their apartments, arresting anyone not wearing a face mask and manufacturing absurdly low infection numbers is the reaction of a terrified authority.
Either the Chinese government is over-reacting or, more disturbingly, it is not. An over-reaction in a totalitarian society is conceivable. Underlings are powerless to question orders from the central authority, no matter how absurd they know them to be. China has a history of mass mobilisations driven by erratic and paranoid political diktats.
There is a second possibility. That what we are observing isn’t an overreaction but a rational response by Beijing, based on information they have yet to share, to an emerging public health catastrophe and the probability that containment will fail.
If we are looking at the second scenario then we are in the early stages of a global pandemic that will cart off many souls before it burns itself out.
It will take several weeks, if not months, before we have an understanding of how far this infection will spread and the ultimate human cost.
My uneducated perspective remains optimistic. Not because of the draconian measures being employed, but that individuals will radically change their behaviour in the face of new information.
HIV burst onto the global scene in the early 1980s. The virus spread wildly for several years before it was identified and the means of infection published.
Once the at-risk communities were aware of how the disease was being spread they changed their behaviour and the rates of infection dropped dramatically.
This outbreak is far more infectious and events are moving considerably faster, but the dynamics remain the same. The low infection and mortality rates outside China provide some comfort that the spread of coronavirus is being thwarted by the drastically changed patterns of human behaviour.
Such optimism may prove to be unfounded.
The economic impacts of the coronavirus on New Zealand are less speculative. Even if we avoid a significant outbreak of the virus few commentators are addressing the potential economic damage, with Reserve Bank Governor Adrian Orr merely describing the outbreak as an ‘‘emerging downside risk’’.
Except it’s not a risk, because a risk is something that might happen. The economic cost of this outbreak is a certainty, only the level remains unknown.
Our dairy, tourism, education, logging and food exporters are already feeling the impact of the disruption in the Middle Kingdom.
Importers will also struggle, increasing the cost of everything from whiteware to electronics. We are heavily dependent on Chinese manufacturing and most Chinese factories are currently closed.
If the virus and the panic that is associated with it continues its spread from Huabei the complex and interdependent Chinese economy will remain drastically under-capacity for much of this year.
China is our largest trading partner with $30 billion in annual trade. This could fall by half in the coming months, placing financial distress on large sectors of our economy. A domestic recession seems unavoidable.
The Sars epidemic peaked two months after it first gained international attention and the disruption was mostly over by the third.
The coronavirus is far more contagious and we are only into the first month of what could be six months of economic turbulence.
Adrian Orr and Grant Robertson will print and borrow money respectively, but as the problem is a fall in real production, rather than domestic demand, this will do little to alleviate the problem.
For New Zealand to avoid a dramatic decline in our already precarious economic fortunes the Chinese economy needs to get back to work within the next month.
This could happen, but based on the news coming out of China, it is looking exceptionally unlikely.
The economic cost of this outbreak is a certainty, only the level remains unknown.