Update on COVID-19: Don’t Panic - it’s Just a Pandemic
At the time of writing our first article about COVID-19, the situation has been worsening for China and its borders, while the rest of the world was confirming the very first cases of coronavirus. Now, panic is spreading like a coronavirus, even in the areas where it's unnecessary.
Pandemics are not Out-of-the-Blue Phenomena
Pandemics are the inevitable attendants of economic progress. Interconnected trade networks and teeming cities have made societies both richer and more vulnerable, from the empires of antiquity to the integrated global economy of the present. The effects of COVID-19 will differ from those of past pathogens, which struck populations far poorer than people today, and with less knowledge of medicine and science concerning viruses and bacteria. The toll should be on a different scale than that exacted by the Black Death or Spanish Flu. Even so, the ravages of the past offer some guidance as to how the global economy may change as a result of the coronavirus.
Management of a Pandemic: from Containment to Mitigation
The basic strategies in the control of an outbreak are containment and mitigation. Containment may be undertaken in the early stages of the outbreak, including contact tracing and isolating infected individuals to stop the disease from being spread to the rest of the population, other public health interventions on infection control and therapeutic countermeasures such as vaccinations. When it becomes apparent that it is no longer possible to contain the spread of the disease, society will then move on to the mitigation stage when measures are taken to decelerate the spread of disease and mitigate its effects on the health care system and society.
A key part of managing an infectious disease outbreak is to decrease the risk of health services being overwhelmed and providing more time for a vaccine and treatment to be developed. Other interventions which can be applied to a flu pandemic may include personal preventive measures such as hygiene control and self-quarantine, or community measures aimed at physical distancing such as cancelling mass gathering events. Another strategy, suppression, requires more extreme long-term non-pharmaceutical interventions so as to reverse the pandemic's development by reducing the basic reproduction number. The suppression strategy includes stringent population-wide social distancing, home isolation of cases and household quarantine.
Pros and Cons of Pandemic Overreaction
When people initially become aware of a risk, they have a temporary short-term overreaction. People pause what they're doing, become hyper-vigilant, check out the environment more carefully than they normally would and- perhaps the most important characteristic of the adjustment reaction-they take precautions that may be excessive, may be inappropriate, and are certainly premature. For example, a person might go get flu antiviral tablets, even though the health servives believe that they shouldn't.
The knee-jerk response of overreacting early to a potential crisis is extremely useful. Like other knee-jerk reflexes, it protects us. People who have gone through it come out on the other side calmer and better able to cope. People become able to cope with a crisis by going through an adjustment reaction, either in mid-crisis, in which case they're late in coping, or they do that in advance of the crisis, in which case they are ready to cope.
We want people to experience this reaction earlier rather than later; a way to accomplish that is to guide the adjustment reaction, rather than criticizing it, as it seems officials often do and journalists sometimes too.
Case Study of Swine Flu (H1N1) 2009 - 2010
A new form of the influenza virus emerged in 2009, infecting approximately 60.8 million people in the US, with global deaths in the range of 151,700 to 575,400. Called the "swine flu" because it appeared to cross over from pigs to humans in transmission, H1N1 differed from typical influenza outbreaks in that 80% of the virus-related deaths occured in people younger than 65. Typically, 70% to 90% of deaths from influenza outbreaks occur in those older than 65.
H1N1 demonstrated just how quickly a viral pandemic can spread in the 21st century, indicating that additional preparations would be needed for the global community to respond faster in the future. A major legacy of the swine flu may have been how it exposed the persistent vulnerability of many countries with advanced healthcare systems to a fast-moving, flu-like outbreak.
Case Study of Ebola 2014 - 2016
The Ebola virus, named for a river close to the initial outbreak, was limited in its range compared to most modern pandemics but incredibly deadly. It began in a small village in Guinea in 2014 and spread to a handful of neighboring countries in West Africa. The virus killed 11,325 of the 28,600 infected people, with most cases occurring in Guinea, Liberia, and Sierra Leone. Of the 8 Americans who contracted Ebola, one died, according to the Centers for Disease Control and Prevention.
Ebola is estimated to have cost a total of $4.3 billion, with inbound investments dramatically dropping in the three countries above. Like "the forgotten pandemic" of cholera, Ebola most ravaged countries least equipped to defend against it.
The Way Covid-19 Decomposes the Predicted GDP
The 'direct' impact of the pandemic in the UK will reduce GDP in that quarter by a few percentage points - the exact fall will depend on what proportion of the population gets sick, the fatality rate and the loss of productivity affected by coronavirus. The impact on GDP for the whole year following the pandemic is much less at around 1 or 2 percent, partly because output after the pandemic quarter is higher as firms replenish diminished stocks and meet postponed demand.
All this assumes that school closures are not taken into account once the pandemic takes hold. School closures can amplify the reduction in labour supply if some workers are forced to take time off to look after children. So, if places of education close for around four weeks, that may multiply the GDP impacts above by as much as a factor of three. Moreover, it's based on the assumption that uninfected consumers do not alter their behaviour. For a pandemic that spreads gradually this seems unlikely, because a lot of consumption nowadays can be called social. We are used to things that bring us into contact with other people: going to the pubs, restaurants, football matches, or travel trips. Other sectors providing consumption services that involve personal contact (such as haircuts) and can easily be postponed may also be hit.
Could conventional monetary or fiscal policy offset the fall in social consumption? Only partially, because the drop in consumption is focused on specific sectors. What is more important, is what would happen if the banks failed to provide bridging finance for the firms having to deal with a sudden fall in demand. The banks may judge that some businesses that are already indebted may not be able to cope with any additional short-term loans, leading to business closures during the pandemic.
Interest Rates Hit the Bottom - the UK Fundamental Issues are Showing Up
Central banks across the world have slashed the interest rates as an emergency response to save the economic situation. For instance, the Bank of England has decreased the interest rates to 0.1% - a record low in the Bank's 325-year history. It would help those who have been hit hard by the crisis, such as small businesses, private limited companies and even young families who may need leverage to sustain and survive, as the borrowing would become more affordable. Keeping the consumer confidence on track is a key for prevention of the long-term damage to supply in these difficult times.
However, the lower the interest rates, the more limited is the banking's system capacity to lend - the liquidity shock is likely to follow. As support is needed to the economy and health system, a government borrowing will be required, which would negatively impact the BoP (Balance of Payments) position. The latest available data from the ONS (Office National Statistics) shows that the UK Current Account Balance of the BoP is £-15,860 million at the end of the third quarter of 2019, - which remains high by historical standards - thus signaling high dependence on imports. The new interest rate level might escalate extensive quantitative easing, making the UK vulnerable and dependent on international borrowings to finance itself, thus creating an even higher BoP deficit and a further current account deficit deepening.
Therefore, it can be concluded that the short-term effect of lower interest rates would be beneficial for the public in a form of cheaper borrowing; however, it would come at a cost of a deepened BoP deficit, and a need to repay debt to other countries in the long term. The dependence on imports and weak goods production are certainly the key issues that need resolutions as soon as possible.
Why Did COVID-19 Cause Increased Consumption?
Nowadays, a lot of countries are in a lockdown to stop the spread of the COVID-19. People are forced to stay at home, following close-downs of most of the shops, only leaving supermarkets and pharmacies available. Such a rapid change of circumstance brings panic to the public and, as a result, there is a lack of products available for everyone, especially those who are mostly in need, such as: families with multiple children, elderly population, and people with disabilities.
In the USA and Canada, people buy everything they can, while in some European countries people mainly buy canned food and toilet paper, fearing the lack of these products. However, there is a rumor about big chains of hypermarkets saying that these companies are generating an artificial deficit of products by keeping them at the storage and not shelving, which, of course, brings retail corporations a huge profit.
What are Supermarket Chains Doing, Regarding Mass Panic Buying?
The coronavirus outbreak has caused panic buying, and a consequence is a lack of necessities available to the public. Local supermarkets are implementing new strategies to tackle the concern; nevertheless, it is assured that there are enough products for everyone. It is only a matter of restocking and irrational rapid demand boost.
In order to make sure that everyone has equal access to the necessities, supermarkets are making online deliveries available, such as the "click and collect" function. For instance, Tesco is pursuing people to use click and collect option to free up slots for deliveries for elderly people, ASDA is recruiting drivers for deliveries, and Sainsbury's has introduced priority slots for elderly and vulnerable customers and contacted 270,000.
In order to stop panic buying, all major supermarkets are imposing limits on each item - Tesco is limiting people to buy 3 pieces of any product, with an exception of 2 pcs toilet roll and paracetamol. Furthermore, the government allowed supermarkets to work collectively in order to share resources, such as staff and delivery vans, and coordinate stock levels accordingly across the country.
Nevertheless, Health Is the Priority
Today, countries are implying strict and rapid actions to stop the spread of the disease, as the number of dead increase, new contagious cases keep appearing at abnormal pace, and mass hysteria seems to affect every single person. The bottom line of all this is that economics are secondary to the health consequences for any pandemic that has a significant fatality rate (as coronavirus so far appears to have). Economics are important in their own right and as a warning to avoid drastic measures that do not influence the number of deaths, but beyond that there is no meaningful trade-off between preventing deaths and losing some percentage of gross domestic product for less than half a year.
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Up to 08.02.2020
References:
https://www.bbc.co.uk/news/business-51962982
https://www.ft.com/content/da9f3db8-6a02-11ea-800d-da70cff6e4d3
https://www.bbc.co.uk/news/business-51706225
https://www.bbc.co.uk/news/business-51737030
https://en.wikipedia.org/wiki/Pandemic
https://www.socialeurope.eu/the-economic-effects-of-a-pandemic