G’day, and welcome back. This week we explore the economics of the Coronavirus (now officially named as COVID-19), the irrationality of fear, and how Iran is particularly vulnerable to a slowing Chinese economy.
Approximate reading time: 4 minutes.
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The economy goes viral
As expected, COVID-19 is growing, with approximately 67,200 confirmed cases and 1,527 confirmed mortalities. Measuring the economic impact of the virus is tricky. Historical comparisons to the 2003 Sars virus are limited, because China’s economy was far smaller, and their integration with the global economy less pervasive.
China currently contributes almost 17% of global growth, up from 4.3% in 2003. Deutsche Bank projects a 0.5% decline in global growth this quarter, as slower production in China disrupts global supply chains. The graphic below from The Economist charts the sectors most exposed to China's supply chain strains.
However, most economic forecasts are prone to underestimation, because it’s difficult to predict the secondary impacts of business adjustments , and the irrational behaviour disease outbreaks often provoke.
Within China, ANZ is expecting China’s Q1 growth to slow to 3.2%, half of Q1 2019 levels, and a 2.8% drop from Q4 2019 growth of 6%. China’s economic growth has steadily fallen in recent years, partly as a natural adjustment following decades of extraordinary growth from poverty, and from debt reduction efforts amidst concerns over financial stability.
Xi Jinping’s economy is a growing dichotomy of heavy handed authoritarian control and centralisation, and a reliance on its entrepreneurial private sector, which contributes over 60% of China’s economic growth. Previous bouts of economic strain in the past 18 months saw Xi implement demand side stimulus – cutting red tape, incentivising lending to the private sector, and lowering interest rates. However COVID-19 is hitting the supply of goods and services, with factories idle, and stores empty. The threat to China’s economy is not a conventional one, and it’s complicated by the irrationality of fear (see below).
In any economy, economic pressure rapidly becomes political pressure, and in extreme cases, instability. While Xi’s position remains secure, he and the Chinese Communist Party are highly sensitive to the dilemma they face at home – containing the disease outbreak as quickly as possible, while convincing its citizens beyond the most high-risk areas to return to work and turn the cogs of economic production.
It's the economy fear, stupid
As I mentioned in a previous edition, the most contagious aspect of COVID-19 is fear. For a political system that derives much of its power over its citizens by fear and authoritarian control, they risk facing a populace more fearful of the disease than the directives of Beijing. A Wall Street Journal essay captured this mood in a comparison to the 1986 Chernobyl disaster:
“A dictatorship built on coercion and lies faces existential risks when it’s confronted with something scarier than its machinery of repression.”
China isn’t on the cusp of revolution, but fear does make Beijing’s penchant for pervasive control – both economic and political – harder.
As the New York Times noted this week, COVID-19 plays on our psychological shortcomings and impairs our capacity to assess risk. We tend to rely on our own experiences and what’s presented to us by the media (coverage of deaths, and not the vast majority who recover from COVID-19), we have a predisposition for novelty over the mundane (COVID-19 versus the flu), and we let instincts of fear override our rationality.
From the same NYT article: “The world in our heads is not a precise replica of reality,” Daniel Kahneman, a Nobel Prize-winning economist, wrote in a 2011 book. “Our expectations about the frequency of events are distorted by the prevalence and emotional intensity of the messages to which we are exposed.”
This is exacerbated by the proliferation of false and misleading information online, in what prompted the World Health Organization to label COVID-19 as the first “Infodemic”. It is this fear that risks pulling economic output lower than projections, and what keeps Beijing’s power brokers awake at night.
From the MIT Technology Review: “It’s a distinction that sets the coronavirus apart from previous viral outbreaks. While SARS, MERS, and Zika all caused global panic, fears around the coronavirus have been especially amplified by social media. It has allowed disinformation to spread and flourish at unprecedented speeds, creating an environment of heightened uncertainty that has fuelled anxiety and racism in person and online.”
There are upsides to the rapid transmission of information from social media platforms, including the pressure that anecdotal accounts have put on Chinese officials to present a more accurate accounting of the outbreak, and novel analyses of social media to track the virus’ propagation.
Further reading: The coronavirus is the first true social-media “infodemic”
Iran feels the squeeze
Isolated economies like Iran are particularly vulnerable to a China slowdown. With Iran’s economy squeezed by US sanctions, China is Iran’s major trading partner, relying on China’s demand for Iranian oil, and their supply of goods to Iranian factories and markets. Iran’s economy is expected to contract by 2.7% this year before the impact of COVID-19. With surging inflation and recent riots over cuts to fuel subsidies, China’s slowing is more kindling to a tinderbox of Iranian unrest.
A question I'll explore in further editions is how Chinese foreign policy is impacted if COVID-19 isn’t quickly contained and China does suffer a prolonged economic downturn.
Book recommendation
“Crude Nation: How Oil Riches Ruined Venezuela” – Raúl Gallegos.
A fascinating account of the extreme economic distortions in Venezuela, and how this impacts Venezuelan life in all aspects. Thanks to Brandon Possin for the recommendation. More to come on Venezuela in following editions of Mundo.
Please feel free to send through your own thoughts and articles to me. Forward this along to others who might find this an interesting read.
Have a great weekend,
Mitch