Sunday, 1 March 2020

Coronavirus

The epidemy (or pandemic) of the SARS-Cov-2 virus that has spread around the world can be hailed as a typical black swan. It hit out of the blue (despite some warnings situation in China could spiral out of control) and keeps wreaking havoc to the entire world.

I am not a medical expert, hence I am holding back from commenting of the medical nature of the virus. As an economist I am observing manufacturing disruptions in China spilling over the entire world, causing dreadful knock-on effects in supply chains. The outbreak of the virus fortunately coincided with the Chinese New Year celebrations, when manufacturing customarily comes to a standstill for 3 weeks and ahead of which period each year off-takers of Chinese factories stock up on goods.

Nevertheless, first symptoms of the epidemy in China have been observed in Poland with distributors of goods produced in Hubei province, particularly of consumer electronics. They declare they would run out of inventories completely if deliveries are not resumed in April. Next stricken are producers who rely on semi-processed components from China (here the automotive industry if most frequently said to be badly affected). As first incidences of the coronavirus were reported in Europe, tourism and transport have been dealt a sudden blow.

The stock exchanges on all continents have suffered the worst week since financial meltdown in 2008-2009. The broad index of the Warsaw stock exchange (WIG) has fallen by 14.2% over the recent week, marking one of the worst weeks since trading began 30 years ago. Melting valuations of stocks reflect fear of global recession caused by the virus. At the moment I would not dare to predict how stock markets would behave in the long run and I do not find myself competent to adjudicate whether financial markets correctly price in the future (since there are too many unknowns pertaining to the future).

I have tried to learn possibly a lot about the coronavirus and the scale of destruction it could perpetrate globally and I still find myself unable to assess whether the risks are overestimated or underestimated. Precautions taken against the virus are stringent, I wonder to what extent they are justified. Definitely bouts of collective panic, as the ones reported in northern Italy, are not desirable, yet they constitute a natural reaction of humans to an unidentified peril.

Media report different figures on mortality. You can divide the number of the diseased to those who have come down with the virus and arrive at around 3%, yet this figure fails to take into account those ill who might die soon. If you exclude those down with the virus whose fate is hard to predict, you will get a proportion of those who have deceased versus those who have recovered at almost 10% which I believe more accurately reflects the degree of the menace.

Across the web, you can find opinions the hype about the virus is exaggerated, since it is no different than a typical flu. Fools who write such rubbish fail to notice three differences:
1) mortality rate of flu (or its aftermaths) is below 0.1%,
2) there are effective vaccinations and cures against flu,
3) the pace of which flu spreads is slower and flu is harder to contract.

In Poland so far no incidence of the virus has been confirmed. Since the period of winter holidays is just over (several people returned from Asia or north Italy), this is just a matter of days. I am pretty sure the coronavirus has already crossed the borders of Poland, but I am not sure whether it has really not been detected (and for what reason) or it has been detected, but the incidence concealed to avoid panic. I also fear information from China have been dosed out not to show the actual scale of the epidemy.

Though I do not fear a potential disease, the virus has shortened my time horizon. A week ago I only feared I would need to work overtime to work out debt restructuring plans for my affected clients. Today I wonder whether my business trip somewhere near Czech border scheduled for Thursday will take place. Making any holiday plans has been put on hold, but besides – business as usual. I am waiting for the story to unfold and watch it carefully, since these days will go down in history.

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