Sunday, March 15, 2020

A Worthwhile Perspective on the Economic Impact of Coronavirus

This will be a shorter post than you normally see here. For the past several days, I've been debating whether or not to write a post dealing with some economic aspect of the coronavirus outbreak, which the World Health Organization classified as a global pandemic last week.

My internal debate has revolved around two issues. First, I'm somewhat uncomfortable writing about the business impact of the outbreak while the virus is still causing widespread illness and a significant number of deaths around the world. That being said, it's undeniable that the economic aspects of the outbreak are vitally important to all of us.

The second challenge associated with writing about the outbreak is maintaining the right perspective. In a crisis such as this, we have a tendency to overemphasize the extreme possibilities and to largely ignore the much more likely probabilities. Focusing on extreme possibilities can easily lead us to (a) unreasonably minimize risks on one hand, or (b) an irrational panic on the other.

So with those considerations in mind, I'm using this post to recommend an analysis by McKinsey & Company that addresses the economic implications of the coronavirus outbreak. This analysis was published on March 9th, and McKinsey indicates that it will be updated regularly as the situation evolves. It's not clear how frequently these updates will occur, so you'll want to check this site every few days to get the firm's current thinking.

Two aspects of the McKinsey approach are particularly important for all of us to remember over the next few/several weeks. First, McKinsey displayed a significant amount of humility about its ability to see the future clearly. The authors of the analysis wrote, "The next phases of the outbreak are profoundly uncertain . . . Our perspective is based on our analysis of past emergencies and on our industry expertise. It is only one view, however. Others could view the same facts and emerge with a different view."

The second important characteristic of the McKinsey analysis is that it presents a range of possible economic outcomes. The authors of the analysis observed, "In our view, the prevalent narrative, focused on pandemic, to which both markets and policy makers have gravitated as they respond to the virus, is possible but underweights the possibility of a more optimistic outcome."

In the March 9th analysis, McKinsey descried three economic scenarios - a "quick recovery," a "global slowdown," and a "global pandemic and recession." It will be interesting to see whether or how McKinsey's thinking will change when the firm updates its analysis.

Image courtesy of Alachua County via Flickr (Public Domain).

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