Coronavirus threatens a true global depression

Arthur Conan Doyle once wrote, “There is nothing more deceptive than an obvious fact.” The creator of the immortal Sherlock Holmes knew this all too well; just when facts are needed, they prove the most elusive.

The coronavirus is the single most important political risk issue to emerge since the Great Recession of 2008, and probably the greatest risk challenge of the 21st century so far.

Like all black swans, the underlying problem is not primarily the catastrophe in front of us (grave though it is), but the unreasoning, very human, fear of the unknown that the pestilence has engendered.

In the spirit of Sherlock Holmes, to dispel this unreasoning fear, a dispassionate political risk assessment of the facts we do know right now is in order. For it is only by marshaling the deceptive, cold, hard facts right in front of our noses that we can calmly, effectively and usefully discuss this pestilence that has befallen mankind.

First, we know that China is the propagator of the coronavirus, and has been by far the worst-hit country in the world. We also know that its government’s lack of transparency — epitomized by the muzzling of the coronavirus whistleblower, the martyred Dr. Li Wenliang — allowed it to spread to the rest of the world.

Beijing’s cover-up (in the damning but correct phrasing of US National Security Adviser Robert O’Brien) cost the world a precious five to seven weeks of preparation for the coming blow. Also, the Chinese statistics about the outbreak have been about as reliable as their economic numbers — they need to be taken with a gigantic grain of salt. It is important that the rest of the world does not let Beijing off the hook over this inconvenient (but salient) fact in terms of the future.

On the other hand, through its draconian response to the crisis of forced quarantine, it does seem as though China (after three or so months of an absolute halt to the work of more than 50 million people in the center of the country) has seen off the worst of things.

This victory is epitomized by Paramount Leader Xi Jinping strolling through the formerly plague-ravaged streets of Wuhan, the center of the epidemic. These facts lead to the conclusion that, ironically, China will bounce back from the crisis relatively strongly compared to much of the world. The coronavirus underpins the emerging reality that we are now living in a bipolar world, with superpowers the US and China vying for dominance.

Ironically, China will bounce back from this crisis relatively strongly compared to much of the world.

Dr. John C. Hulsman

In Europe, things are bleaker, as the EU leadership seems utterly nonexistent; hiding behind over-matched national governments at the very moment European solidarity is most called for. Italy, the center of the crisis on the continent, is in total lockdown. France, Germany and the UK are awaiting the hit that is almost sure to come from the virus over the next seven to 10 days, as they will surely follow exactly in the Italians’ unsteady footsteps.

Relatively, the coronavirus is bound to hammer the declining continent, as it is demographically old and was already headed into a mild, garden-variety recession (given the sclerotic economies of Italy, France and Germany) even before the crisis. Given its generic, glacial decision-making response to crises in general, the coronavirus will find Europe falling even further behind.

This leads us to the US. While blessed with the most dynamic developed economy in the world, America is also cursed with terrible political leadership in both parties. For example, President Donald Trump went from calling the virus a hoax propagated by Democrats to banning flights from much of Europe in the space of only 12 days.

Such see-sawing, inconsistent leadership is absolutely the last thing the world needs right now. While, given the blessings of the Atlantic and Pacific Oceans, it will take slightly longer for the coronavirus to hit the US with full force, doubtless it will come. The main political risk danger to America from the virus is America’s faulty leadership itself.

So where do all these facts leave us? What conclusions can we draw from them? Sadly, this is one of those cases where the doomsayers are absolutely correct. The coronavirus will be a political risk calamity of the first order, particularly in economic terms.

China, the economic motor of much of the world’s growth, cannot have 50 million people — the population of Spain — doing nothing for a full quarter without this massively affecting the global economy. Italy, a G7 country, cannot lie fallow for months at a time without the consequences adding up.

And, do remember, the virus has yet to hit economic powerhouses Germany, the UK and the US with its full force. The real political risk question is whether, through skillful policymaking, a true global depression can be avoided, with a recession similar to 2008 (with perhaps a quicker bounce-back) being the least bad option. Look for staggering market losses of 20 to 40 percent before a relatively robust upturn.

The facts suggest that the best way to deal with such a calamity is to first acknowledge its seriousness. This we must all do, and now.

• Dr. John C. Hulsman is the president and managing partner of John C. Hulsman Enterprises, a prominent global political risk consulting firm. He is also senior columnist for City AM, the newspaper of the City of London. He can be contacted via www.chartwellspeakers.com.