Coronavirus’s potential effect on consumer spending and global growth has stoked fears of a new Great Recession. The stock market is tanking, tourism in Asia is grinding to a halt and the global supply chain has been disrupted. But is this widespread anxiety rooted in reality?
Credit card stocks are tanking even more than the broader market during this week’s coronavirus-induced sell-off.
As of midday Friday, American Express was down 16% for the week, Discover was down 14% and Mastercard and Visa had both fallen 11% (compared with 10% for the S&P 500).
Card companies are especially sensitive to consumer spending and confidence. That has made them excellent investments throughout the past decade’s economic expansion – over the past 10 years, Visa’s stock is up about 1,000% and Mastercard’s has surged nearly 700% while the S&P 500 rose 155% – but all of a sudden, fears about consumer spending and global growth are sparking comparisons to the Great Recession.
But how much of this is anxiety and how much is reality?
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Coronavirus and consumer spending: What we know
Higher consumer spending accounted for 80% of America’s real GDP growth in 2019, according to the White House. In China, the world’s second-largest economy, the figure was more like 60%, McKinsey & Company reported.
If people aren’t traveling, going out to eat and spending money in other ways, businesses feel it, and they feel it fast. Goldman Sachs warned on Thursday that coronavirus may wipe out all corporate profit growth this year and could lead to a global recession.
Since COVID-19 – the coronavirus strain that has everyone on edge – originated in Asia back in December, we have the most data from that market. And it’s depressing – Macau’s hotel occupancy rate declined 97% from early January to early February and Hong Kong’s fell 64%, the hospitality data company STR stated.
Shanghai Disneyland and Hong Kong Disneyland have been closed since the last week of January, with no word on when they might reopen, and Tokyo Disney Resorts announced a two-week closure on Friday. Even the tourist attractions that have remained open in China, Japan and other nearby countries have seen sharp drop-offs in visitors.
The global supply chain has also been affected since China is such a manufacturing powerhouse. For example, Apple believes it will fall short of its second-quarter guidance because of production slowdowns related to COVID-19. Meanwhile, travel stocks have been hammered worst of all: American Airlines is down 22% this week, Carnival Cruise Line 21% and United Airlines 19%, to name a few.
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Why are we freaking out about coronavirus – and not the flu?
I’m more afraid of the economic and societal impacts of COVID-19 than the medical side of things.
It scares me when I see headlines like the CDC warning that “disruption to everyday life may be severe,” Japan closing all schools for a month, top-flight Italian soccer teams playing in empty stadiums and Facebook calling off its annual developers’ conference.
There are also rumors that the Summer Olympics – scheduled to begin in late July in Tokyo – could be postponed. One stock that’s doing really well is the videoconferencing company Zoom, which has risen 47% over the past month as investors believe companies will ramp up virtual meetings.
I don’t mean to minimize the human toll at all, which encompasses at least 83,861 cases and 2,867 deaths worldwide, according to Johns Hopkins. But I also know that it’s a big world. Something like 0.00001% of the Earth’s population has been infected by COVID-19, and even among those who have been diagnosed, only about 3% have died (most of whom were elderly or had compromised immune systems, according to reports).
What I can’t reconcile is that there are between 3 million and 5 million severe cases of the flu each year, per the World Health Organization, and that illness causes between 290,000 and 650,000 deaths annually.
But we don’t see anywhere near this level of media coverage or economic impact attributed to the flu. Are we all freaking out with limited justification, or is there something we don’t know about COVID-19?
It’s human nature to panic over something new and unknown, especially in the age of social media, and especially when we don’t yet have a vaccine or a definitive treatment for COVID-19. But the CDC says “most people with mild coronavirus will recover on their own,” so again, is there really this much cause for alarm?
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The economic impact could get worse before it gets better
In the long run, heck, probably even a year from now, the stock markets and society as a whole should be just fine.
But what will happen between now and then? If Americans are this panicked with approximately 60 known cases in the U.S. – just one of whom did not travel to a hard-hit location or come in close contact with someone they knew had done so – what happens if and when cases start showing up on public transit systems and at theme parks and stadiums within our borders?
Right now, you’re more likely to win Powerball than be infected with COVID-19 in the U.S.
The ripple effects will be massive if our schools, workplaces, transit systems and entertainment destinations shut down like they have in other countries. What if Las Vegas’ hotel occupancy falls 97%, as Macau’s did? What if the Disney parks in Orlando and Anaheim close for weeks? What if it’s the New York Rangers, not just Inter Milan, playing a game in front of zero fans?
I think political and economic leaders are at a crossroads. They need to decide whether the possible benefits of quarantine outweigh the definite costs of closing down. It’s encouraging that new COVID-19 cases seem to have leveled off in China and business activity is starting to resume.
Hopefully, the global spread can be contained quickly and our worst fears will not materialize.