The novel coronavirus, which causes COVID-19, continues to spread worldwide, with more than 88,000 cases reported. Most of the cases are from mainland China, but cases have been reported in countries like Italy and Iran, as well as in New England. MassLive reports that health officials in Rhode Island say two people tested positive for the virus after returning from a high school trip to Italy.
Coronavirus has also affected travel and manufacturing in China, which impacts the global economy. In the US, the stock market is reacting, posting its worst day in history last month. Carolee McGrath sat down with John Rogers, an economics professor at American International College, to learn how coronavirus impacts the economy, both globally and in the United States.
JOHN ROGERS, AMERICAN INTERNATIONAL COLLEGE PROFESSOR OF ECONOMICS: Well, I think this really took everyone by surprise. It’s what economists sometimes call a Black Swan event—like 9/11, it just…nobody saw it coming—and it has impact directly, but it also has huge indirect impact simply because of the uncertainty and the volatility that that generates in the markets.
So, I think you could start to break it down between the supply and the demand. The demand is you have businesses closing down—restaurants, entertainment—so there’s a negative impact on the economy there, which drags down the price of stocks in those industries. But even more significant is the supply side.
So many companies depend on production, particularly from China but now that it spread to South Korea, Japan, these global supply chains are very complex and very sophisticated and very wide reaching. And they’re directly affected. Something like 10 percent of the people were showing up for work in the Apple production factories in China. So, this has a devastating effect on just the ability to produce things.
CAROLEE MCGRATH, HOST of CONNECTING POINT: So, let’s talk a little bit about China. In their effort to contain everything, shutting down factories and you mentioned specifically Apple. Apple saying that they’re not going to reach their target whereas, you know, prior in the year they were looking really great. So, this is a big surprise, I’m sure, for them as well?
Oh absolutely. Now I was rather impressed with Tim Cook, who’s the CEO of Apple, was in an interview last week and he was kind of downplaying the long-term. He said “We’re in it for the long term. We have a lot of short-term disruptions but we’re very comfortable or very confident about the long term.”
And it looks like the whole epidemic or pandemic whatever you want to call it, is pretty much under control in China. So, people will start coming back to work and that production will pick up. So, I think that’s the good news. The bad news is it spreading to so many other countries.
But talk also a little bit about, you know, medical supplies—which are also, a lot of those components are made in China which has been another concern for people.
Absolutely. So that whole supply side equation is very much dependent on international sourcing and China’s the biggest source of those things. I think when they had the SARS epidemic back in the early 2000s, that had an impact. But I think the global impact of China on trade is something like five times greater than it was 15 years ago when you had the SARS epidemic or 17 years ago.
So, it’s very significant for all kinds of businesses, even automobile businesses that depend on certain parts coming from China. Wide-ranging effect, And that’s much more difficult to address, because you can always address the demand side with some tax cuts and fiscal stimulus and Trump is browbeating the Federal Reserve to lower interest rate. So you can do some things to goose up the demand side—the aggregate demand—but it’s more difficult to address the supply problems.
And do you think that will happen? Because the interest rates weren’t cut too, too long ago?
Well, I think most people…that’s one of the reasons I think for the rally this morning—Monday morning—is people pretty much baked in that in March, when they have the next meeting, the Federal Reserve will bring the interest rate down. And our interest rates is one of the president’s hobbyhorses. Our interest rates even though they’re low, they’re higher than the other major economies—Japan , Germany, Switzerland—so I think that will happen.
So let’s talk a little bit about the stock market. You were mentioning a rally, but there pretty much had been a 10%, or maybe a little bit more, of a correction from the rally record highs in January, where the Dow was at like 29,000. That has come down.
It’s really ironic—or disturbing or maybe depressing—we had this huge rally right up until the week before. And then it hit all-time highs, and then last week it just collapsed. So, the—uh—correction is typically defined as a 10% drop. This was, I think, an eleven-and-a-half percent drop. Now it’s come up a little bit this morning, but very, very volatile and it’s just one of those things that nobody saw coming.
And is it the fear that obviously rattles investors as we move through this?
Yes, I think basically markets don’t like uncertainty. So even though you could say, “maybe this will blow over” or “maybe it’s going to be under control,” the public health systems are responding pretty aggressively.
So, there’s a lot of positive news you could bring to bear. But you just don’t know. You don’t know how—and the medical community is really not entirely clear where this virus came from, what or how contagious is it, what are the mortality rates— there’s just so many unknowns that generate this uncertainty.
And it’s all coming so fast that the markets just retract, and people say “hey, I want to get out of the stock, so I’ll put my money in bonds ,” which are safe. And so you have the bond prices going up, which means the interest rates are going down, and that’s why people are saying “well, this is a good time to get a mortgage or refinance your house.” Because the interest rates are so low.
So that’s sort of the good news, or the demand side. Maybe if people go out and buy a new car, refinance their house, that’ll take some of the burn off of what’s happening to the economy.
And so when you talked about it really took a lot of people by surprise—because at first you thought, “okay, this was something that that China has to deal with.” But of course, now these other countries—including Italy, which has had some pretty big numbers, more than a thousand, I think, over 1,600 at this point of cases. And that affects, of course, tourism as well, you have college students there, people taking trips, I mean that’s another big hit.
I think the effect on the economy in Italy is devastating. And the European economy, generally, and the Italian economy particularly, has been a bit stagnant over the last couple of year. So this is the last thing they need. They were starting to perk up a little bit, and this is going to be a pretty serious hit.
I think they’re looking at negative economic growth for the year, or certainly for the first quarter as a result of this.
So, when you have like, companies that shut down for a few weeks—or like, even in Italy, I know they were quarantine people and shutting down schools and restricting travel—if it happens for a week or two, how quickly can the economy recover? Or is this going to just have a long-term effect on their ability to come back?
Well, the economy can recover, but it—you never make up for the fact that that was a meal somebody didn’t have in the restaurant or that was a play or an opera that they didn’t see, so there’s certain things you never recover. The the economic activity will pick back u, and there may be some pent-up demand, there may be some things that people didn’t do and they’ll go out and do it a little bit more. But you you’re gonna lose that that period.
One of the things I think, that’s interesting is, it may give a big push to something that’s already a trend, which is working from home or working virtually. So why do you need to bring everybody together in these big office buildings? Why not equip them with the technology and just let them stay home and work virtually?
And that has the advantage of containing the virus spread, but it also has some productivity advantages. And a lot of people nowadays like that idea of being able to work virtually, so it may give a big push to that. That could be one of the unintended consequences.
Do you think by the summer that this will just be kind of a thing of the past? Is that what the expectations are of a lot of people?
Well, I think the expectations are as the weather gets better and as these containment efforts, these quarantine efforts, pay off, that it’ll come under control. But you don’t know. We just don’t really know enough about it.
There’s two new cases I believe in Rhode Island. New York is reporting a case. How do you think this will affect things locally, as far as the economy?
Well, I think it could be pretty significant. Because if you look at what’s happening in Washington and parts of California—and definitely what’s happening in Italy and Japan and Korea—it may be necessary at a certain point for governors to just say, “hey, we want the schools closed” or “people will work from home.”
I’m at a university. What do you do with all the students? I mean, they’re going off on spring break next week, and they’re gonna be traveling all over the place. And they’re gonna come back. How are you gonna control that? How are you gonna monitor it? What happens if their cases that appear after these Spring Break trips? Do you shut the school down and send everybody home? There are, the consequences—again, it’s more short-term rather than long-term—but they’re pretty serious for a big chunk of the economy.