The spread of the coronavirus has the full attention of policymakers, businesses and the general public. But as we grapple with the public health consequences of the virus, another question remains: how much will the epidemic disrupt the economy?
It’s impossible to accurately predict what the virus’ eventual economic impact will be, but there are two factors that will determine the magnitude of the potential crisis: the ultimate public health toll and the Trump administration’s policy response. So far, the Trump administration’s response to mitigate the economic harms of coronavirus has been woefully inadequate. But there is still time to act.
Unfortunately, many of the most pressing public health questions are still unanswered. How many people are infected today? What is the mortality rate? What exactly is the transmission rate? What measures are effective for containment? How long will the outbreak last? Information is incomplete, and in certain places where we do have some data, experts do not fully trust statistics from China. This uncertainty is not only problematic from a medical perspective, but also makes economic projections difficult because the only surefire way to get the economy going again is to reduce the public health crisis and give consumers and workers confidence to return to normal.
The Trump administration’s ability to deal with crises is also in question. The White House has responded to the potential pandemic by ignoring, minimizing and politicizing the coronavirus. Serious action has been delayed, allowing this outbreak to fester. Congress has stepped forward with some supplemental appropriations that will help, but more may be needed. And the administration’s poor track record on public health calls into question their ability to effectively implement any aid package.
More broadly, the administration’s fetishistic focus on corporate profits and the stock market continues to stand in the way of quick and aggressive, government intervention. Meanwhile the economic toll of the virus is mounting. We know the coronavirus is disrupting the production and delivery of goods and services around the world, especially in China. Some factories are not producing, many workers are staying home, while high-tech components and other parts become scarce. These shortages are already being felt across the U.S.; factories are missing parts they need and retailers have fewer products to offer.
Global supply chain issues are being matched by reductions in demand. People are traveling less and shopping less, which could lead some small businesses to miss payroll, further forcing workers to curtail spending. Some of this missed consumption may never be recouped: spring break vacations and business travel — all of which pour millions into local economies — may not be taken a month or two later. Given lower demand and increased uncertainties, businesses might feel less inclined to invest.
In parallel, financial markets have become more volatile and stock prices have declined, with investors seeking refuge in safe assets such as U.S. treasury bonds and cash. Historically, stock market losses tend to make consumers and investors even more cautious, with the end result being even lower consumption and investment. This could create a vicious cycle as economic growth declines around the world, amplifying negative consequences for the U.S. economy.
So how big will this hit on economic growth be? The Organization for Economic Co-operation and Development (OECD) has already cut its world economic growth projection this year by 0.5 percent, while bond markets indicate a recession is likely. The coronavirus undoubtedly has the potential to be a sizable shock to the world economy. This threat has prompted central banks (including the Federal Reserve) to lower interest rates. And, encouragingly, governments and organizations like the World Bank and the International Monetary Fund are reacting largely in a proactive way. But, since interest rates are already close to zero, there’s not much room for more cuts.
Epidemics require decisive, centralized action and coordinated implementation. Public health needs are the first order of business, in particular medical testing and treatment, appropriate quarantines and enacting paid sick leave to minimize the spread. We need federal leadership to address the public health crisis and support small businesses. All this requires a change of attitude from the administration, an acknowledgement of the scale of the problem and a willingness to invest considerable financial resources to prevent a crisis from spinning out of control. In short, we need a healthy dose of fiscal stimulus right now.
Ultimately though, the administration will have to answer whether they will continue to view this public health emergency as another cost to be borne by already-squeezed working families and cash-strapped states and municipalities, or whether they will recognize the broader economic need for a bold, coordinated federal response. Until these questions are answered and fiscal stimulus is acted upon, the ultimate economic impact of the coronavirus in the economy remains in question.
Andres Vinelli is the vice president of Economic Policy at the Center for American Progress.