While many economists and politicians are predicting a rapid recovery once the Wuhan virus outbreak has subsided, their optimism seems premature.
I suspect most politicians think that their predictions of a rosy outcome once all this is over is helpful and will calm people’s fears.
And the fear is palpable. It’s the reason people have begun hoarding items they think are essential to their peace of mind in the coming weeks. It’s the reason we see people breaking down in tears or lashing out. We have even seen suicides.
The recovery, however, is going to depend on a lot of factors over which we have little control and on whether governments have an exit strategy.
To give you an indication of the depth of the problem, economists were predicting that the number of Americans filing for unemployment benefits would be around 1.5 million. To their shock it was more than three million.
As it stands now, the United Nations is estimating that the losses in global GDP (GWP) are upwards of $1 trillion.
That’s probably on the low side. Global world production (the combined GDP of all nations) is about $127 trillion. So it’s difficult to believe that the virtual shut down of global production has amounted to less than one per cent of GWP.
We won’t know the full impact of the virus’ impact on the economy for another few months, but the longer this goes on, the harder it will be to recover.
How much longer will it go on?
Health officials in the United States are talking about another 30 days of isolation and lock downs before the worst is over.
To judge by the European example, that may be too optimistic.
Let’s hope it is only another 30 days of Hell, because if it goes on for months, getting back to normal will be next to impossible.
The reason being that there are not too many businesses that can survive without revenue for three months.
There are even fewer families that can survive a month, let alone three months, without income.
It’s a cascading effect that is devastating. Once the link between employer and employee is broken, restoring it is hard.
This crisis is unlike the 2008 financial crisis. That was basically a liquidity crisis which the central banks could resolve.
But how do you revive businesses that have gone bankrupt? How do you bring back production?
China is going through that right now and it’s clearly having problems. It’s trying to jump start production but it’s not working.
That’s why you need an exit strategy. You need to get people working sooner rather than later and you need to do it while still protecting the most vulnerable.
It all comes down to treatment, vaccine and testing.
An effective treatment would reduce mortality and get people back on their feet quickly. That is being worked on.
A vaccine will be long in coming. In the past, it’s taken a year or more to get one out to people. Can the timeline be shortened?
Failing all that, you need fast, reliable tests for the virus. And you need to keep testing on a regular basis.
With that kind of testing, you can offer people a chance to return to work and still protect the elderly and those with underlying illnesses.
We’ve got to get people working again. There’s no two ways about it.