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Coronavirus could push major economies into the abyss

Military personnel outside the Duomo cathedral, closed by authorities because of the coronavirus outbreak, in Milan. (Reuters)
Military personnel outside the Duomo cathedral, closed by authorities because of the coronavirus outbreak, in Milan. (Reuters)
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29 Feb 2020 03:02:54 GMT9
29 Feb 2020 03:02:54 GMT9

As I have said here before, it is wise that even the best political risk analyst approaches the world with a degree of humility. For example, if you had told me at the beginning of the year that I would spend the lion’s share of my February writing about a possible pandemic originating in Wuhan, I would have questioned your sanity. But life, while it does have patterns, does not move in a straight line. The absolutely central question remains: What causes things to actually happen and can they be foreseen?

Here, inevitably, we come back to the coronavirus. For all the global fear this near-pandemic has generated, I think the enduring political risk consequence of all that is going on is likely to be economic. While the virus is not the main cause of the possible economic calamities awaiting China, Iran and Italy — all of which were already teetering on the edge of economic downturns or worse — its unforeseen deleterious consequences could well provide the final nudge into a much deeper abyss.

The economic mismanagement that preceded the black swan incident was there for all to see; all it takes is a final unexpected setback to reveal how the world was living on borrowed time.
Of the three, superpower China is most likely to ride out the economic storm, but there remain serious risk concerns. For one thing, a full month after the paramount leader, Xi Jinping, announced to the world the extent of the coronavirus, much of the country, even those portions little-affected by the virus, have yet to return to work.
This, coupled with the fact that a gigantic area around Wuhan — the center of the virus outbreak — is under full quarantine (more than 50 million people, or approximately the population of Spain), means that every day the virus remains untamed is another body blow squarely directed at the Chinese economy. The longer this lasts (and at present the coronavirus shows no signs of burning out in this centrally affected region), the harder it will be for an embattled Beijing to rebound.

But, even before the coronavirus struck, there were some under-reported danger signs flashing regarding the continued vitality of the Chinese economy. Gross domestic product (GDP) growth had naturally slowed from its double-digit prime to an official number of 6 percent, though the real figure is universally thought to be lower — a natural consequence of the economy maturing.
Structurally worse, China’s perilous demographic position — a result of the decades-long one-child policy — means the country could well grow old before it grows rich. All of this was already well in place ahead of the advent of the coronavirus.

One long term and hugely disadvantageous consequence of the virus for Beijing is that China’s bungling initial response will accelerate the decoupling of the US and Chinese supply chains; a process already begun with the US-China trade war. The coronavirus could well mark an unexpected chapter in the undoing of globalization itself.

Italy’s glaring economic inadequacies are more advanced and, as a result, the danger from the unforeseen shock of the coronavirus is more immediate. A simple, glaring fact must be kept in mind when discussing the country: Italy is poorer now, uniquely in Europe, than it was at the time of the Great Recession in 2008.

The most recent GDP numbers emanating from Europe only confirm this decade-long sclerosis. In the fourth quarter of 2019, Germany, the motor of Europe, stagnated (growing at zero percent), while the economies of France (minus 0.1 percent) and Italy (minus 0.3 percent) actually went backwards. Compared with recent relatively buoyant growth rates in economic competitors China and the US, the past decade can be characterized in political risk terms as a time when Europe was simply left behind.

Italy’s fragile economy, bereft of anything approaching political leadership and direction, is greatly dependent on tourism, which accounts for fully 13 percent of its GDP. With the continent’s coronavirus cases centering on Lombardy and the Veneto, it is hard to imagine tourism not taking a fearful hit this year. And, with this, Italy may well fall off the economic tightrope it has long been walking on and into the abyss.

All it takes is a final unexpected setback to reveal how the world was living on borrowed time.

Dr. John C. Hulsman

Iran, despite its hapless and feckless denials, is another emerging center of the outbreak. Years of governmental economic mismanagement and the surprisingly effective sanctions ushered in by the Trump administration as a result of its regional adventurism had already left it a basket case; it is projected that GDP slumped by a whopping 9 percent last year. A further shock to this imploding system could well lead to political and economic upheavals that have not yet been thought through.

In each case, the coronavirus has not caused the problems to come; rather the epidemic amounted to the last unforeseen negative consequence, enabling an already precarious situation to get out of hand. This is how the world really works, and how those of us who do political risk for a living must be thinking as the planet weathers this latest, fearful, plague.

  • 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
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