The most recent Chinese economic data highlights the impact of the virus in Hubei province, the epicenter of the outbreak in China. Economists had projected that industrial output in February would contract by 3% year-on-year. It fell by 13.5%. It was suggested that retail sales would fall by 4% year-on-year. They fell by 20.5%. The, now daily, broadcasts from western politicians highlight that Covid-19 will generate a deeper and more prolonged slowdown than many are yet prepared to accept and that most of us have ever seen.
Estimates of the final economic 'bill' for the crisis rise every day and, based on the latest suggestions coming out of the US, point to 5% of GDP. This is an enormous sum and more than the fiscal cost of the 2008 'Credit Crunch'. The human cost of the economic void we are entering will eclipse that generated directly by the virus. To begin with, we should expect to see a rise in job cuts and business failures.
As for markets, the mood swings in risk tolerances remain at extremes. While sharp bounces generate hope, they can be just as destructive as limit-down days. There is the potential for markets to close for a few days.
This grim outlook will inevitably lead many investors to question the extent to which they should be worried. Over the next few months we should be very concerned indeed, particularly as there is a significant human cost directly related to Covid-19. The economic cost is also something that we will all be forced to adjust to.
But we have faced formidable crises before. I am reminded of the excellent quote from Mark Twain: "I have lived through some terrible things in life, some of which actually happened." The Covid-19 virus has actually happened and we should rightly be very worried by its consequences. But Twain's quote reminds us that not all of our deepest anxieties come to pass. Life goes on and at some point we will begin to see potential for things to improve.
When this is eventually over, the post-mortem will come down hard against global supply chains and see a sharp increase in what each country deems to be strategically essential industries. It may well deliver the rebalancing across advanced economies that many have argued for. Localising (of manufacturing for example) will put sustained upward pressure on prices, although that is unlikely to worry central banks. In the world of fixed income, the multi-decade bond bull market is coming to an end. They may look too risky a bet at the moment but longer-term investors, not slaves to short-term performance, should focus on quality real assets.
The 'Paradox of Thrift' highlights that there might be merit for an individual if she/he chooses to spend less but if we all adopt this approach, then nobody spends anything, and we all suffer. By extension, a possible 'Paradox of Isolation' might have some of us hunker down to escape the virus but if we all go into hiding then, when we come out into the daylight, there may be nothing left to enjoy. Isolate by all means but sustain consumption as much as you can and as locally as possible. Your spending is someone else's livelihood.