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The Economic Hit from the Coronavirus is All in Your Mind

The Economic Hit from the Coronavirus is All in Your Mind

Friday, 21 February, 2020 - 06:45

For all the stimulus measures that officials are rolling out to combat the economic impact of the coronavirus, lower interest rates and bigger budgets are unlikely to make people feel immune. And it's consumer behavior that will influence the magnitude of any hit. The gap between how people perceive the risk of becoming ill and the likelihood of actually contracting the virus can be vast, driven wider by feelings from past experiences, vivid images or simply fright.


A study by the Asian Development Bank, published in October, pins a lot of the economic damage from severe acute respiratory syndrome on psychology. At the height of the 2003 outbreak, 23 percent of respondents to a public-opinion survey in Hong Kong thought they were either very likely or somewhat likely to be infected. The number of cases wound up at 1,755, according to the World Health Organization, which would have been roughly 0.026 percent of the population. In Taipei, 74 percent rated the likelihood of death following contraction of Sars at four or five on a five-point scale compared with an actual mortality rate of 11 percent.


"Individuals, under prevailing circumstances of poor information and stress, can arrive at biased subjective assessments concerning the risk of disease contraction," Ilan Noy and Sharlan Shields of Victoria University of Wellington in New Zealand wrote in the ADB paper. "This leads to panic and suboptimal decisions, which in turn result in an excessively high cost."


The setback from Sars was acute: China's gross domestic product growth slipped to 9.1 percent from 11.1 percent in the second quarter of 2003 while Hong Kong, Taiwan and Singapore all took a hit. The impact went beyond metrics such as lost working hours, mortality rates, treatment costs, consumer spending and aborted travel; there's the unquantifiable toll of generally avoiding social contact, too. Individual psychology also trickles up to affect companies. Investment and supply-chain decisions are governed by projections about demand during an epidemic and the recovery from it. Apple said on Tuesday that revenue will disappoint because component manufacturers are seeking to contain the virus, in addition to the effect on sales of store closures and reticent shoppers. A day earlier, Nintendo said it will struggle to get Switch consoles to US and European markets because of a production bottleneck stemming from the virus.


China's economy is more consequential than in 2003. Its citizens travel more widely and its companies are more intertwined in global capitalism. That restaurant visit forgone in Hong Kong may cost jobs in Hamburg. To limit the impact on growth, then, leaders need to think carefully about how to minimize our natural impulse to be afraid.


In Singapore, the government is urging citizens to carry on with life, taking extra precautions to stay healthy and avoid panic-buying. Officials have asked for public trust and, in return, have pledged to keep people informed. That's a far cry from Hong Kong, where businesses are on lockdown, schools are closed, basic amenities have been stripped from the shelves and public transportation is empty. We're a long way from knowing what the economic and psychological costs of the current epidemic will be, not to mention the number of lives lost. But if Singapore strikes the right tone, it may well become the model for crisis management.


Bloomberg


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