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

For those who 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, usually unforeseeable, or at least unexpected, will sweep in and put everything awry.

It seems increasingly certain that the outbreak of coronavirus spreading from Wuhan, China, is such an unanticipated disturbance to the global, the North American and Canadian economies. And yesterday Canada's finance minister Bill Morneau said 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 would represent a decline in growth of more than one-third.

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, related virus 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. The  International Monetary Fund estimates that in 2020 that economy represents nearly 17 percent of global activity compared to around four per cent in the era of SARS. Thus the global coronavirus effect will be much larger.

Just in time 

In an integrated global economy operating on the strategy of just-in-time delivery, shortages of key parts caused by the shutdown of Chinese factories have 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 home and, as Morneau said yesterday in Calgary, the outbreak has 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. 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 enough can 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 recession may be pushed over the line.

Places like Europe, already glutted with monetary stimulus, may demand more with uncertain results. Already China has delayed attempts 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 with existing outbreaks may show our understanding of transmission is flawed.

"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 suppress Li 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 coronavirus impact 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 to Canada's medical system that learned so much during the SARS outbreak, 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 Don on Twitter @don_pittis