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The virus and the bear market

Assessing the ultimate damage from measures to counteract the spread of the new coronavirus is extremely difficult. But it’s obvious there will be some winners and losers.

Assessing the ultimate damage from measures to counteract the spread of the new coronavirus is extremely difficult. Buy it’s obvious there will be some winners and losers.

by
John Redwood

in Features

12.03.2020

It is easy to predict that things will get worse economically before they get better, as the novel coronavirus spreads its chilling grip on more countries. It is very difficult to quantify the potential damage to output, turnover and company profits, as we still do not know how long the virus will dominate, and how many countries will take Chinese or Italian-style actions to try to limit its spread.

Without more governments shutting down regions or their whole country, we can estimate that there will still be less travel, fewer events, lower levels of tourism and fewer stays in hotels. People will divert from physical shops to online. More people will self-isolate and there will be layoffs and short-time working in the affected industries.

In practice, other governments will take some Italian and Chinese-style actions. The US has announced a travel ban from continental Europe to the US, hitting aviation and tourism severely. If countries close schools then parents have to stay at home to look after the younger children, absenting themselves from work.

Guidance is impossible

Many companies have decided not to update their shareholders, given the large uncertainties affecting their businesses. Many official forecasts of country output and growth have not yet been adjusted for plausible estimates of the impact of the virus. We will see the news gradually coming out, as figures are reported on what is happening as the virus changes behaviours.

Most governments wish to be guided by the scientific advice to limit or control the spread of the virus. Most accept that rapid spreading of the virus to too many people in their population places undue strains on health services, and would reduce the workforce available to work in a damaging way.

Their experts, in turn, accept data and advice from the World Health Organisation, which seems to think China has done a good job in containment after the initial delays in tackling the outbreak. China decided to isolate as many people as possible in the worst-affected areas and use strong powers to limit travel, cancelling public events. We should expect more countries to adopt parts of the Chinese approach.

Western challenges

The democratic West will moderate this response, taking into account public opinion. In a free society, governments can only enforce measures for which there is substantial consent. The politicians in charge have a difficult task reconciling medical advice with what is feasible. They have to balance the uncertainties within the advice about what will be effective against the uncertainties of how effectively any measure can be enforced.

As this is a new virus, experts themselves cannot be completely certain about how it is transmitted or how it will behave. They are working on vaccinations and other responses and may learn more from studying Chinese people who have recovered, who may have developed some defences against future attacks.

At the extremes, these are life and death issues, given the way the vulnerable and ill can succumb to the illness. Those of us who have the less onerous task of weighing up the economic consequences can think about the short-term impact of the virus and the response, and ask ourselves whether there are long-term changes that may result from the shock to our lifestyles the virus has brought.

The pattern so far seems to be that consumers increase spending on pharmaceuticals and medical supplies on a precautionary basis. They buy stocks of dry, tinned and frozen food, and large stocks of personal and domestic cleaning items, hedging against the possibility that they will be sent home to live for fourteen days with little contact with the outside world.

The food and drugs industries are probably a net beneficiary in the short term. Meanwhile, consumers cancel or fail to book new events, travel, hotel stays and discretionary services. This spending will be lost, though I would expect a decent recovery once the all-clear is sounded over the virus, or once societies get used to living with some level of the virus in circulation.

Accelerating existing trends

The beneficiaries in this situation are all those businesses offering online and digital alternatives to transactions and activities requiring personal contact with staff. Schools closing in China organised online lessons for pupils. Many Colleges and universities have web-based learning which they can adapt to wider use, as I hear is happening in Italy.

Health care systems are insisting that people with symptoms like those the virus generates should seek advice online or on the phone to avoid contamination of surgeries and hospitals. People are buying more of what they need and want on the internet to avoid physical contact with large crowds on public transport and in what were busy shopping centres. Families are likely to seek entertainment from downloads at home instead of visiting theatres, cinemas, sporting and other events.

Governments and central banks are now producing substantial packages of support for businesses suffering cash flow shortfalls owing to a sudden loss of customers. This is important to see sound businesses through troubled times.

The issue is how much of this likely change will be short-lived, and how much of it will permanently change the pattern of supply and demand? It is likely that some of the spending that transfers to the internet will stay online.

The impact of the virus is accelerating trends that have been at work in our economies for some time. This will probably speed up the closure of shops and shop chains that were struggling to compete anyway, with the loss of more stores on the high street. It will also intensify the move of more successful retail companies to sell more online and have fewer physical stores. It will encourage a wide range of service providers to invest more digital alternatives. Healthcare systems will use more online consultation and diagnosis and education will use more web-based course materials. It is bad news for retail property and good news for warehouse and office property serving the digital revolution.

It is less likely to change the wish of people to visit museums, galleries, sporting events, theme parks and the rest as parents look for ways to entertain and inform their children and retired people look for things to do. Much of this demand will return as soon as people think it safe to do so.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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