How Badly Could the Novel Coronavirus Epidemic Whack the U.S. Economy?

Looking at better and worse projections.

Investors evidently, for the moment, think that the novel coronavirus outbreak is going to hurt the global economy. The S&P 500 stock index is down about 19 percent from its highs a month ago. Only time will tell if those fears are justified, but a couple of economists at the Australian National University use econometric modeling to trace out scenarios to help the public and policymakers better understand how the COVID-19 epidemic could play out over the coming year. Keep firmly in mind that these are scenarios, not predictions.

In these scenarios, the Australian researchers seek to take into account the ferocity of the disease, and how consumers, producers, and governments will react. They try to quantify macroeconomic variables such as the direct costs of the disease, the costs of global supply chain disruption, the effects on labor supply, and how consumer spending will fall as a result of people's efforts to avoid exposure to infection in public spaces.

Let's set aside the three scenarios that chiefly focus on the disease's effect on China, and look specifically at the broad effects on the U.S. economy in their better- and worse-case scenarios. In their better-case scenario (scenario four) the researchers calculate that the overall mortality rate in the U.S. would be 0.07 percent, resulting in the deaths of 236,000 Americans in the first year.

It is important to note that the mortality rate is calculated by dividing the entire population by the number of disease deaths. The case-fatality rate is calculated by dividing the number of infected people by the number of people who died of the disease. To get at what the case-fatality rate implied by these scenarios might be, let's assume the coronavirus infects people at about the same rate as a 1918 Spanish flu epidemic U.S. infection rate of 28 percent. Today that would mean that 90 million Americans would contract the virus, implying a case-fatality rate of just under 0.3 percent. The seasonal flu case-fatality rate is around 0.1 percent.

In their worse-case U.S. scenario, the Australian researchers calculate that the disease would kill about 1,060,000 Americans in the first year, yielding an overall mortality rate of 0.3 percent. Assuming the Spanish flu attack rate, that implies a case-fatality rate of 1.2 percent. That is just half of the U.S. 2.4 percent case-fatality rate for the 1918 Spanish flu epidemic.

In the better-case scenario, the COVID-19 epidemic would reduce U.S. GDP by 2 percent or about $420 billion. In the worse-case scenario, GDP would drop by more than 8 percent, that is, $1.8 trillion dollars. For comparison, real U.S. GDP fell by 4.3 percent during the Great Recession a decade ago, reducing U.S. GDP by about $650 billion.

In the Australian researchers' scenarios, the coronavirus outbreak also whacks the stock markets. "Equity markets drop sharply both because of the rise in risk but also because of the expected economic slowdown and the fall in expected profits," explain the authors. As it happens, today is the eleven-year anniversary of the S&P 500's Great Recession bottom closing price of 676, down from its 1,565 high closing price on October 9, 2007. That was a 56 percent decline.

The researchers' scenarios project a fast, V-shaped economic recovery as the epidemic wanes in the next year.

The researchers devised these scenarios as a way to argue that possible big losses stemming from pandemics justify greater investments in public health measures. But how plausible are the scenarios with respect to the way the novel coronavirus epidemic is currently playing out?

Consider that in their best-case scenario for China, the researchers calculated that the epidemic would kill 280,000 Chinese people in the next year and, in the worst case, 12.6 million Chinese people would succumb to the disease. Although the coronavirus is continuing its spread across the globe, the fact that China has reported 3,120 deaths and the rate of infection is dropping suggests that even the Australians' best-case scenario may prove to be too pessimistic. Let's hope so.