COVID-19 is a black swan

COVID-19 is the black swan event that no-one saw coming. There is no precedent and so historical models tell us very little as to either the global health implications or the global economic implications. Much of the commentary we are reading is both facile and fallacious, often tailored to fit prior perspectives, and in other cases based on fundamental ignorance.

My own take on events is that the global outcomes are going to be major and that COVID-19 is going to be with us as a global black swan throughout all of this year. Export-focused agri-food will be less affected than most sectors.

For those not familiar with the term ‘black swan’, it is a random event, unable to be given a risk probability in advance, that changes many things. The associated hypothesis is that most of the mega-events that truly change the world are black swans.

The original black-swan notion goes back to a belief more than two thousand years ago in Rome that black swans were birds that did not exist – in those days no-one apart from Australian Aborigines knew that there really were black swans living in Australia, with these now released and established in many parts of the World. However, black-swan thinking has now morphed to being about low-probability unpredictable events, both good and bad, that change the world and are then rationalised with hindsight.

If we want to understand something about the COVID-19 black swan, then the starting point has to be the emerging epidemiology. From what we already know, this is a virus that behaves with fundamental differences to common influenza, with common influenza traversing the globe each year with mutating forms, low death rates, and infectivity following the path of winter seasonality. This COVID-19 virus is also fundamentally different in its epidemiology to SARS, despite belonging to the same broad category of corona viruses.

The key features of COVID-19 are that it is highly infective, and that transmission can occur before symptoms become evident. This early transmission is the reason why control is much more difficult than was the situation with SARS, for example.

At this stage it is difficult to estimate the true mortality rate for COVID-19. This is because deaths typically do not occur until at least two weeks after symptoms are evident. However, there is an emerging consensus it could end up around two percent, perhaps more. This is about 200 times greater than mortality rates for common influenza. This is serious stuff.

The epidemiology that I follow closely is for Singapore, Japan, and the specific situation of the Diamond Princess cruise ship. After that, I follow Chinese provinces such as Zhejiang and Guangdong which are telling their own story.

In relation to Wuhan and Hubei, I largely ignore them in terms of understanding the epidemiology, beyond recognising that there is a huge epidemic and that the authorities are overwhelmed. The authorities have now acknowledged that they themselves do not know the true level of infection.

As I write this, Singapore has 67 confirmed infections, with nearly all in clusters. The Singapore health authorities release detailed information daily for all relevant cases, including age, gender and the specific location within Singapore where they believe this person was infected, together with consequent high-risk contact situations. Very few other countries will be able to match this level of precision and transparency, but the confirmed cases are still growing each day.

So far there have been no deaths in Singapore, but 12 percent of the cases are in a critical condition. Other cases have not yet had time to get to that situation.

The virus appears to have got less of a head start in Japan than in Singapore. This increases the chance that Japan can close it down through strict quarantine.

In contrast, the situation on the Diamond Princess at Yokohama demonstrates how in a confined environment the virus runs rampant. It is all very well to restrict passengers to their cabins, but the disease is also circulating in the crew and not all crew can be confined.

I could write a lot more about the epidemiology, but the key message is that this virus is unlikely to be shut down without very high levels of quarantine. Also, the delay between infection and symptoms, combined with infectivity during this period, means that shutting the disease down will be a slow process with ongoing breakouts.

If quarantine and travel restrictions are relaxed prior to total eradication then the virus will fan out explosively as in Wuhan.

However, I do have modest confidence that a vaccine will become available in less than the oft-quoted minimum of one year. I think China will short-circuit the Stage 1 trials and that there will be no shortage of volunteers. The key impact of a vaccine, given to high-risk people not currently infected, will be to complement community-wide quarantining to reduce infectivity. It is unlikely to benefit those already infected.

So what does this all mean in terms of implications for economic activity?

My assessment is that global tourism is going to be greatly affected. For New Zealand, this will mean not only from China and elsewhere in Asia, but from Europe, with most of these tourists typically transiting through Asia. The cruise industry will grind to a total halt. I cannot see a rebound in less than one year. Similarly, the international education market will take a full year to recover.

I expect the forestry sector to suffer a major downturn but the rebound will come faster than for tourism. It will come when China can get its infrastructure development program up and running again. However, infrastructure development will only be a second-level priority for China.

China’s food production industries will be given priority and I am hearing from Chinese sources that this is already occurring. However, it is almost inevitable that there will be supply delays, with crop farmers struggling to get chemicals and animal farmers struggling to purchase feed. For example, nearly all of the big dairy farms purchase their feed from elsewhere including imports.

Almost certainly, China will give port priority to food imports. As one related example. I am advised that China has given high-level guarantees that New Zealand cattle shipments currently on the water will be given absolute priority on arrival.

Similarly, I expect that milk-powder imports will be given high priority. However, the meat logistics are more complex. At least in the short term, a lot might depend on the status of Dalian Port and the convoluted internal meat-processing supply chain. Fingers crossed on that one.

Another reason why agricultural export returns will be buffered over time is that I expect to see the New Zealand foreign exchange rate decline. This is because, as an export and import focused economy, we will be affected more than Europe and the US. We will earn more New Zealand dollars for our exports but New Zealand imports will become more expensive. This will impact inflation.

One of the remarkable features of the global COVID-19 black swan event to date is that global stock markets have been barely affected. I think this is because those markets have been unable to price the risk. It may also reflect the lack of alternatives that investors face. Trying to predict share markets is an art well beyond my capabilities, but I do express some surprise at the resilience of those markets.

The combined effects economy-wide of tourism, forestry and international-education downturns would seem particularly relevant for New Zealand. Substantial loss of jobs would seem inevitable.

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, China, COVID-19, Dairy, Meat Industry. Bookmark the permalink.

18 Responses to COVID-19 is a black swan

  1. asweinert says:

    A great analysis Keith.

  2. Tom Walker says:

    Here is Guangzhou economic activity has just about stopped,schools are closed,factories are closed,office workers are working from home,ninety percent of shops are closed..the local Government are saying schools etc will open early March.Most people are ”hunkered” down at home and only venture out to buy food where your temperature is taken at supermarkets,getting on buses,trains entrance to housing estates etc.One would think for the Chinese government to take such drastic measures that the virus must be a serious health risk…but with the 5 million people leaving Wuhan and dispersing over China for the New Year holidays before the lock down it would seem the ”horse has truly bolted”!

    As for the irrational behavior of the stock was exactly the same leading up to WW1,no drop in prices right up until the guns stated firing!

  3. Rod Mckenzie says:

    Great bit of research, analysis and clear thinking Keith.
    I have shared it with my investment advisors, and will be interested to see if they recommend some selling of affected stocks here and in China
    I hope the virus does not like the cold in Japan next week when I ski there!

    • Keith Woodford says:

      Thanks Rod
      The problem investment advisers have with a black swan event such as this is that they have no analytical tools to assess how it might affect the economy. The historical data for SARS has no relevance for COVID-19 because of the fundamental difference in epidemiology. But most investment advisers have no understanding of this epidemiology.
      COVID-19 is now circulating in the Japanese population but at very low levels. This means that the risk of individuals being infected is still exceptionally small, but at the population level there are increasing concerns as to how to stop the spread. Big questions now as to where it will all be by the time of the Olympics!

  4. Tracey Kelton says:

    I would like to see more ‘analysis’ about the link between increased antibiotic resistance as a result of proliferating factory farming and the (seemingly) large increases in zoonotic disease transmission between animals and humans.

    • Keith Woodford says:

      Antibiotics act against bacteria but not viruses. Accordingly, antibiotic resistance is an issue for bacterial diseases but not for viruses. The chief weapon for viral diseases is vaccination. That should work for COVID-19 which so far has shown no eivdence of mutating. Vaccines are not efective for cold viruses because thre are too many different serotypes ( with genetic resistance). For the same reason, vaccines are only partly efective for influeza, which also has multiple serotypes.
      Antibiotic resitance affects our ability to treat bacteria diseases and hence their severity in humans, but I know of no evidence that it actually leads to more transmission between animals and humans.

  5. Daniel Viotti says:

    KEITH ,

  6. Good analysis Keith. Yes the mortality rate of this one much higher than ‘common influenza’ but lower than the 1918 Spanish Flu with estimates at the bottom end of 2.5% and some populations over 30%.

    • Keith Woodford says:

      I think it is increasingly looking as if mortality rates can be low as long as seriously ill patients can get access to ICU facilities. In Wuhan those facilties have been overwhelmed. I see that the Japanese are now asking people in Tokyo to try and avoid crowded commuter trains as part of their efforts to slow down the transmission.

      • David Porter says:

        I think that’s a very important point Keith. We maybe are seeing an artificially low death rate now compared to if the disease really takes hold. If you’re going to catch COVID-19, catch it early while the hospitals are still able to cope. If you recover, you’re immune so safe(ish)!

  7. David Porter says:

    Is the best strategy to up the biosecurity levels and hope COVID-19 can be kept out until a vaccine is available?
    I think you’re right in that the vaccine will be fast tracked too. Maybe it will fizzle out before long but it isn’t showing any signs of doing so at the moment so a vaccine is the one hope of avoiding a lot of deaths when the outbreak becomes widespread and overwhelms the health service..

  8. Greg Smith says:

    We have 10,000 deaths minimum, and sometimes double that, in the US from ordinary flu every single year, like clockwork, and they don’t declare THAT an epidemic or an emergency. So why are they issuing stern warnings when less than two dozen in the US have been diagnosed with the COVID-19 and only two so far have died and the rest are recovering? So far, the usual yearly mutating flu is way ahead of COVID-19 in real time with no real indication that COVID-19 is even close to catching up. I guess we’ll see. Right now though “black swan” concerns seem premature but it makes a great headline.

    • Keith Woodford says:

      The key diffeence is the mortality rate and the fact that the COVID-19 epidemic is still at a very early stage, with COVID-19 being highly infectious. This is evidenced by the fact that in the two weeks since I wrote that article the number of confirmed cases outside of China has increased by a factor of approximately 10. The current evidence is that strict quarantine does work but anything less than that does not work in terms of pulling back the infection rate. And once the infection numbers reach a critical point the health services become overwhelemed.

  9. MM Kubo says:

    Black swan indeed. In the 13 days since you posted this, equity markets have slid, knifelike, reversing a year’s worth of gains. Hoping there will be a coordinated global effort to combat the virus.

    • Keith Woodford says:

      Yes, I am inclined to the view that many economists are driven by the information they can see in ther econometric models, and these models are based on historical events. In this case, we have no historical events, so it is a case of trying to work through scenarios. To get a feel as to how this might all play out we should note , for example, that all schools in Japan are closed for the next month, and even in Switzerland, no functions with more than 1000 people are allowed. Much of Italy is now in lockdown. There is a fine line between recognising the logistical constraints that are building and being alarmist. My own perspective is that a global recession is now inevitable as countries (correctly, in my opinion) place priority on slowing down this disease. However, if countries were to step back from strict quarantine procedures (in my opinion, that would be a very bad policy), there would still be a major recession. In ths country, the health authorities will be quickly overwhelmed unless strong quarantine is put in place.

  10. Neil says:

    Keith I’ve taken an interest in your posts since my medical herbalist put me onto A2 milk way back in 2012. I can’t believe I didn’t sign up to the subscriber list to get notification of new posts! So I was a little late reading your premonition.
    I was also a little late seeing the Bill Gates clip doing the rounds on social media, when he warned about a virus pandemic back in 2015.
    2 great minds that are alike.

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