However, there is no doubt that it is a significant economic and financial problem in large part because the government response being quite draconian driven by the need to be seen to be doing something. Italy is close to virtually closing down its economy for a few weeks. The Chinese economy is also functioning well below capacity and it is the world's second biggest economy. The US markets have been significantly overvalued for some time so the fall in stocks of around 20% from their highs is just a normal correction. What does concern me is that central banks cannot easily solve this problem by printing money and cutting short and long term interest rates as these are already at record lows. Also there is only limited scope for fiscal deficits to address the problem as any fiscal expansion will mainly be swallowed up by increased healthcare expenditure to deal with the crisis.
There is a real risk to many businesses caused by the supply side shock as important components produced in China may not arrive, food supplies could be disrupted, employees will take time off and school closure will also hit the available workforce. Then there is a demand side shock as people will go out less, shop less and events such as conferences, theatres, cinemas, restaurants, sport events, hotel and travel are all significantly impacted upon. There will be a big hit to business and consumer confidence.
All this will mean a significant short term hit, perhaps we are looking at a fall in US and UK GDP of as much as 6% of GDP over the next 6 months. However, the shock is likely to prove transitory and there will be a noticeable rebound once the virus has peaked. However there will be permanent damage to many businesses especially those that are already highly indebted. I expect quite a few businesses will not survive this kind of shock. This is also bad news for banks that have high exposure to small and medium size businesses. I think it will take a couple of months for markets to bottom perhaps another 15% lower than today. Oil might sink down to $25 due to the fall in demand combined witth the Suadi-Russian split on propping up the price.
Overall, however this is a transitory and not permanent shock to these economies. The hit will be significant and it will take sometime for a meaningful recovery in stocks to take place. There is still scope to increase national debts and run large fiscal deficits for a year to cope with this one-off crisis. Ultimately the virus while a killer has fatality rate of below 1% and is more likely to affect older people. It will however have a profound and significant effect on many people that do not have significant savings to see themselves through this particular crisis. State assistance will be urgently needed to help these people.