The COVID-19 black swans keep bearing down

It’s only fifteen days since I wrote about the coronavirus black swan. In that time, both nothing and everything has changed.

In that time there has been no scientific breakthrough of a treatment or vaccine. Shockingly high transmission rates in the absence of strict quarantine were evident both then and now. Mortality rates have not changed greatly. However, the outbreak has now progressed along its global path. Consequently, the evidence is now much starker and closer to home.

Fifteen days ago, I said that we were understating the effects that this COVID-19 virus would have on daily life. In part that was because many people were trying to compare the early-stage incidence of COVID-19 with the all-of-year situations from common types of influenza. Also, there was a void between those who understood something of epidemiology and those who understood something of how economies work.

Quantitative economists have been caught like possums in the headlights. Their econometric models are unsuited to an event like this. The problem for these economists is that we have never in the past seen a similar disruption on which they can base their models. In contrast, supply chain specialists are better skilled to see scenarios for supply chain disruption. However, transferring that knowledge through to employment and economy-wide effects requires another skill-set that few if any people possess.

Fifteen days ago, the coronavirus focus was on China. In the background, the cases of Hong Kong, Singapore and Japan were signposts to how things might or might not play out. I pointed to those in my article. At that time, the remarkable success of China in reducing disease transmission was less evident than now.

Back then no-one was thinking about South Korea, Italy and Iran.  How could one predict that it was in those specific countries where the next coronavirus black swans would emerge?

The closing of schools across Japan, the cancellation of major sporting events in many countries, plus the exponential growth of the epidemic in South Korea, Italy and Iran, have all changed public perceptions in recent days. There is increasing acceptance that a global mega-event is apparently bearing down upon us.

Increasingly it looks like Germany, France, Spain and even the USA all have internal community transmission occurring with no clear back-traces as to source. Where do we go from here?

There are still lots of unknowns. Will this virus have the same exponential growth in tropical countries as in countries still coming out of winter? I see indications that it does not transmit as freely in tropical countries – for example Vietnam, Malaysia and Singapore have not experienced the same exponential growth rates as Italy, South Korea and Iran, or even Japan. But any hypothesis about winter versus summer transmission could be easily blown away in the coming days.

The key experiential message to date is that ultra-strict quarantine, linked with diligent tracing of transmission pathways from the outset, is the only way to stop or at least slow down the pandemic. Does that mean in New Zealand, for example, that all international arrivals should be able to demonstrate support networks to self-isolate? That would largely restrict arrivals to residents. How can any other approach hope to break the transmission pathway?

It now seems inevitable that New Zealand as well as most of the world will head into recession. The key issue becomes rapid support for those who lose their employment. This is much more important than the specific number of the GDP decline.

There is considerable risk that the Government and Reserve Bank will use the wrong macro tools. Adjusting interest rates looks like the wrong medicine. The priority should be to get cash into the hands of those who currently live week-to-week.

The idea of bringing forward new infrastructure projects might sound great but such things cannot happen quickly. A ‘helicopter approach’ of getting cash directly into the hands of those who need it might well be the best approach.

Two weeks ago, I anticipated the major agricultural industries would be more resilient than many other industries. This was because I expected the exchange rate to drop and that has indeed been occurring. Also, as long as the coronavirus focus was on China, I was confident that the Chinese Government would keep food imports flowing. That is still the case. I am advised that dairy exports to China are indeed flowing but beer exports are stacked up. How that might now play out in other markets is less clear.

Although China has now passed the first hump of infection, China’s path forward remains opaque. My China networks tell me that there are a lot more people out on the streets, but the specifics vary by province and even county. In reality, China has always operated a decentralised system.

The problem in China is the likelihood of pockets of coronavirus just waiting to burst forth as soon as people start using public-transport systems. Also, many Chinese factory workers live in factory dormitories where there is minimal personal space. From today’s data, it looks as if new cases might be starting to creep up again.

I now expect the forestry downturn here in New Zealand will be for many months and may well go beyond this year. It is very hard to see a rapid bounce-back in Chinese demand for logs.

China has other options to radiata logs from New Zealand. European spruce that has died from bark beetle is now being logged. It fits the same formwork market niche as our radiata logs. This was disrupting the market even prior to coronavirus.

The New Zealand meat industry faces a real conundrum with complicated logistics. The meat companies lack the financial power to purchase large quantities of stock without clear visibility as to where markets are going. They may well need bridging finance from Government. Many farmers are already stressed by the effects of drought and lack of feed.

In recent weeks the Chinese Government has advised its citizens that they should consume the equivalent of 300 ml of milk per day to help with their immune systems. If Chinese citizens tried to do this there would be a huge shortage of dairy products which neither China nor New Zealand could fill.

As for tourism, the effects for New Zealand look like being disastrous. The notion from a few weeks back that new tourists could be sought from regions of the world other than China was always more than a little naïve. Planning of overseas holidays by nearly all global citizens is now on hold. Perhaps some real Aussies might still come, as well as the deportees.

What we now need from our Government is clear communication of strategies and required behaviours if and when the epidemic should really strike here. At what point would schools be closed, sporting events cancelled, and people asked to work from home?

Whatever is decided it may well be too late and our health facilities will be overwhelmed. The global evidence is now very clear that health workers are particularly at risk.

It is all about the stitch in time. That might be right now.

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, forestry, Meat Industry. Bookmark the permalink.

6 Responses to The COVID-19 black swans keep bearing down

  1. Tom Walker says:

    Not sure if you know it or not Keith but Hong Kong is using the ”Helicopter” money approach with all residents there having 10,000 HKD given to them to stimulate the real surprises after months of riots and now the corona virus their economy is devastated.

    • Keith Woodford says:

      Yes. That appears to be the equivalent of $NZ2000 per person. Hopefully the NZ Govt would have a mechanism to get it to those who are out of work rather than to everyone.

  2. Greg van Paassen says:

    We also need banks to loosen credit policies so that companies can continue to make payroll.

    They’ll probably want a government handout for doing so, to which the response should be “your handout is that we won’t make laws to force you to do what you should be doing as a responsible corporate citizen”.

    • Keith Woodford says:

      I would hope the banks would be developing internal policies that protect the securities that they hold. That may well mean providing mroe credit in some cases because it is in their self interest to do so. But I also think it is very difficult to ask banks to do anything that is not in their self interest.
      I see a role of Govt to help those who are poor and downtroden through no fault of their own. I like to see that help given at the level of individuals and families and not to business units. Even then, there will be a few individuals that manage to rort the system but that is OK with me in the greater scheme of things. But assistance to business units is another matter. I am OK with that as long as it is to small business and is indeed a loan and not a grant, but it can be a slippery slope. There is a big moral hazard with lending to business.

  3. Dean says:

    Hi Keith,

    Firstly, just wanted to say I find your articles very insightful, keep up the good work!

    I’m interested in your thoughts on how dairy farmers would weather a scenario where the world enters a global recession and lending becomes extremely difficult (i.e. bursting US corporate debt bubble). Will this accelerate falling land values?

    Many thanks


    • Keith Woodford says:

      Thanks Dean
      I need to do some more thinking on those issues. With finance there are so many ways things could go as so much relies on sentiment.
      But I am reasonably confident that China will soon be back to close to full business, whereas the rest of the world is likely to struggle for a long time. Products like wine are therefore going too struggle for a lot longer than dairy because:
      (a) Most wine markets are in the West
      (b) Wine is discretionary.
      Timber will also probably struggle but that is for other reasons.
      So dairy is a safer bet for the banks than many other types of business. But the banks may choose to not see it that way.
      I see China becoming even more impprtant for New Zealand over the next year or so, although that notion is currently very unpopular among many Kiwis.

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