The rapid spread of the disease caused by the coronavirus is upending economic forecasts following an initial U.S.-China trade agreement that showed some progress between the two countries.
While detailed predictions would be foolhardy at best, now that COVID-19 has become a global pandemic spreading throughout Europe, North America and beyond, a worrisome economic picture emerges that allows some preliminary analysis.
First, the impact of the virus on the global economy will be more severe and prolonged than that of the SARS crisis in 2003, as well as other recent epidemics, such as Ebola and MERS. Second, COVID-19 is creating three types of economic shock with direct impacts on Hawaii.
The first is a “supply shock” that has been developing since mid-February. China is by now the biggest trading nation in the world, tightly integrated into global value chains ranging from electronics to cars and biopharmaceuticals. As such, the shutdown of most industrial activity in China due to the virus outbreak caused a global effect, generating various shortages of materials and industrial inputs.
In Hawaii, Honolulu rail contractor Hitachi Rail has warned that it expects “serious problems” in its supply chain for its rail cars, which involves both China and Italy hit hard by the virus (though the head of Honolulu’s rail authority has given assurances that rail will open for partial service by the end of this year).
Fortunately, China’s gradual return to work is improving things. Most U.S. manufacturers and retailers have been able to work around shortages by having sufficient inventory, sourcing parts from other countries, or air shipping parts from China after the resumption of work there.
By now, the far bigger concern is a massive “demand shock” for the global economy, especially as our U.S. economy faces similar shutdowns to what occurred in Italy. Key parts of Europe and North America are emerging as new hot spots for the pandemic, meaning services ranging from entertainment to retail and tourism experience a nearly total drop-off in demand.
This is especially worrisome for a Hawaii economy heavily dependent on tourism, with visitor arrival figures already dropping in the double-digits. In turn, a drop-off in tourism will impact state tax revenues and various government programs and services.
Alas, the most dangerous economic shock by COVID-19 is the “financial” one.
World equities have been extremely volatile and on a downward trend. More ominously, credit markets are freezing up, forcing the U.S. Federal Reserve to decisively intervene with a massive infusion of liquidity. So far, the Fed’s actions have kept the basic functioning of the financial system intact.
The greatest trepidation is that many businesses with debt will not survive. A coronavirus-induced shutdown could spark a wave of defaults among small- and medium-sized enterprises, then spreading to larger corporations, all depending on how long the pandemic lasts. Such a wave of bankruptcies would impair the credit of financial institutions, setting off an insolvency crisis, during which no one is willing to lend out money. The resulting credit freeze could dwarf the effects of the 2008 financial crisis.
Policymakers are aware of these dangers, and various initiatives debated in Washington aim to ease credit access for small enterprises and tide them over hard times. In the end, to forestall a massive demand shock becoming a financial shock requires the creation of additional demand.
The most direct means to this is by ramping up government spending through infrastructure projects and direct transfers. Federal lawmakers are, for instance, considering placing $1,000 checks into the hands of Americans to help pay bills and buy groceries, as Hong Kong has done with a roughly $1,283 handout for every city resident.
Gov. David Ige has alluded to the necessity of ramping up spending, but this time Hawaii’s government will need to think really big. Let’s hope it does not come to this, but let’s also brace for each of these economic shocks and prepare accordingly.
Christopher A. McNally is a professor of political economy at Chaminade University and an expert on U.S.-China relations.