The Coronavirus epidemic comes at a particular time for the global economy. The forecasts made in December 2019, that is to say, before this epidemic, were not stellar. Already in 2019, growth had been only 2.9%, among the lowest figures seen since 2008, when markets were hit by the financial crisis.
Vulnerabilities increased in most major economies over the course of last year. This made prospects for 2020 all the more uncertain. Growth was contracted at a 6.3% annual rate in the fourth quarter in Japan, and Japan still is the world’s fourth-largest economy. This was a much sharper than expected result. It could be explained by another consumption-tax hike. In Germany, industrial output fell sharply in December (-3.5%). The situation was not rosy in France either, which posted negative GDP growth for the fourth quarter and very bad results for industrial output (-2.6%). Hence, the world’s economies, respectively, were experiencing their own troubles. The United States, the world’s second-largest economy, still appeared relatively resilient by comparison. Nevertheless, 2.1% real (inflation-adjusted) GDP growth in the fourth quarter of 2019 hardly qualifies as a boom. And in China – now the world’s largest economy in purchasing-power-parity terms – growth slowed to a 27-year low of 6% in the last quarter of 2019. Some were already questioning if globalisation had not gone too far. They would certainly be strengthened by what happens now.
The Coronavirus epidemic (COVID-19) then provided a telling example of the consequences of globalisation. From a strictly sanitary point of view, we have been witnessing an epidemic; the virus presents a fairly low level of danger but it is highly contagious. This is why the number of cases is much higher than those of the 2003 SARS epidemic and the economic consequences will be far greater. This epidemic, which started in China, then spread around the world due to means of transport, reviving traditional quarantine measures.
There is in fact little difference exists between the “plague of 1720” in Marseilles and COVID-19 in terms of how these mechanisms spread, if it is not obviously the dangerous nature of the disease. The outbreak two centuries ago was also linked to the globalisation of the time. It was a ship, Le Grand Saint-Antoine, which brought germs and their vectors, fleas and rats, from the Levant. However, this epidemic was not inevitable.
It was as a result of serious negligence, and despite theoretically-strict safeguards which included the quarantine of passengers and goods, the plague spread in the city. It seems that the rules of the quarantine were not respected and that the allure of quick gain allowed for the ship’s cargo to be unloaded too quickly. As was often the case in this type of epidemic, the poorest and oldest districts were the worst affected. The plague spread quickly in the city, where it caused approximately 40,000 deaths among 80,000 to 90,000 inhabitants. Then, it spread throughout Provence, where it claimed between 90,000 and 120,000 victims among a population of around 400,000.
If they had been correctly applied, as history indicates, the quarantine measures of the 18th century, as with our “containment” measures, would have been effective. There would certainly have been deaths, but no epidemic. It was because the decision had been made to put profit before security amid the risk that the disease could spread.
This combination of greed and reckless risk-taking is found in part in the city of Wuhan, but also in the initial decisions of the Chinese government, which sought more to silence whistle blowers than to take measures, which, in the last days of December, could have limited the epidemic in Wuhan.
The consequences of this epidemic on the world economy will be significant but cannot be precisely determined at the time of writing. These consequences will nevertheless be vast, given the weight of the Chinese economy. During the SARS epidemic in 2003, China only accounted for 8.5% of world GDP. It now has a weighting of almost 20%. The consequences can be classified into three categories.
First of all, there are the immediate consequences of the shutdown of a large proportion of Chinese industries. Production is falling, but the consumption of raw materials is also falling. If, during the first quarter of 2020, China’s GDP fell by -2% as forecast, then that means a decline of -0.4% in world GDP. The direct impact, for a country like France, but also for Russia, which is now exporting a larger and larger share of its hydrocarbon production, is to be noticeable. The fall of oil prices in February was an ominous warning. For France the pain will be made even greater with the drop in tourism and related consumption.
However, production outside China is also affected because a non-negligible part of the added value produced in Europe is linked to Chinese production. Thus, between 60% and 80% of the active ingredients in pharmaceutical products are produced in China and India. Likewise, in the automotive industry, many components, from electric vehicle batteries to electronic components, are made in China. So beyond the direct shock there is an indirect shock. The value chains imply a presence of China in world production and not only among products ostensibly made in China.
Finally, there will be a delayed shock. Other countries are affected (South Korea, Italy, and even the United States). The direct effect of this epidemic, like the panic effect it causes, will have deleterious consequences for production. Affected countries outside China should see their production drop in the second quarter of 2020. The OECD study of the impact of the epidemic, which figures at -0.5% for the year, while taking only an “average” estimate into account, clearly shows COVID-19’s impact on the world economy.
If these effects manifest themselves in the real sphere, this epidemic will also have financial consequences. Many companies will find themselves with cash flow problems due to the drop in their turnover. This mechanically causes an increase in “bad debts” for the banks. Insurance companies will also have to compensate insured customers for epidemic risk. Of course, central banks are aware of this problem. They will keep the rent for money very low. However, their capacity to boost production is actually quite weak. We measure here the relative weakness of financial instruments. In fact, governments will have to take control of what has been recognised by French Minister Bruno Le Maire.
This epidemic has raised awareness regarding the principles of economic sovereignty, whether this sovereignty is pharmaceutical, agricultural, or even industrial, are central to the stability of our societies. However, these notions of economic sovereignty contrast with those of globalisation. Thus, through a crisis that one could think of as fleeting, it is the whole balance between globalisation and sovereignty that is called into question.
