The current bout of SARS sweeping the globe (I prefer to use the scientific name SARS-COV-2 vs the generic terms COVID-19 or coronavirus) has, or will have, negative impacts on too many key sectors of the economy to fully enumerate. Analysts have difficulty in properly modelling revenues, expenses and earnings when more than a couple of variables are uncertain. Due to the fact that this bout of SARS will impact most forms of discretionary spending, I can think, just off the top of my head, far more than two sectors that will be crushed. I will detail just a few below and indicate their importance to the global economy.
1. Global Tourism. Global tourism accounts for roughly 10.5% of world GDP. In 2019, global tourism accounted for more than $9.3 TRILLION dollars of global GDP. The amount spend is both foreign and international tourism; museum revenues, shopping revenues, hotel and restaurant revenues, conventions, conferences, cruises, package and non package tours, air and land travel, etc. Some sectors may be terminally impacted, such as the cruise line industry. Given the level of indebtedness incurred by the industry in order to purchase a single floating vessel, it goes without saying that even a three to six month cessation of travel, or boats with minimal occupancy, should result in chapter 11 bankruptcies. The airline industry can operate for longer periods of time with low utilization given the propensity of governments to offer financial aid during times of crisis, and this is most certainly a time of crisis. However, it should be a reasonable expectation to assume that the contribution of $9.3 trillion of GDP will be savaged in 2020. Should western governments not stomp out the spread of the virus promptly, then the financial impact will spread over at least two fiscal quarters and will not recover for perhaps a year. Therefore, it is reasonable to anticipate a decline in global tourism revenues in the range of $4 trillion US throughout 2020.
2. Media Industries. Global media contributed roughly $2.2 trillion US to GDP worldwide. The motion picture and television industry represents a key driver of this revenue. The number of film shoots and tv series work will inexorably grind to a halt in the coming weeks. Movies and films already completed will have releases delayed; those delays will impact the financial results of the firms that have expended capital for production. The marketing industry that creates positive press on media work is essentially out of business for now. There will be few public gatherings to see the finished product. The financial impacts of the cancellations, postponements and delays are difficult to quantify, but rest assured, they will be severe. It is reasonable to assume that a 25% reduction in GDP from this industry sector is potentially looming for 2020.
3. Global Sports. The global sporting industry, both professional and amateur, produces about 1% of global GDP and has grown faster than economic growth as a whole. For 2020, it was expected that the fiscal contribution would have topped $1 trillion for the first time. The entire sector is done. All leagues, from children’s fun leagues to adult professional leagues and amateur leagues of any sport are now, or will be soon, put on hiatus until the smoke clears. Expect a decline in GDP from this sector of at least half, or $500 billion, and that’s being generous.
These three sectors account for more than 15% of global GDP. if things don’t right themselves, then as much as 50% of that contribution will be deferred for at least one year. The global economy could be $7 trillion smaller, as a result of the utter collapse of these sectors for 2020.
Aside from the common causality of the collapse in this sector, that being the SARS outbreak, what do all of these industries have in common?
1. They employ higher than average numbers of people. Global tourism alone accounts for more than 340 million persons directly employed in the industry. Media and sports are also large employers. The layoffs, perhaps temporary, perhaps permanent in some subsectors, will result in tens of millions, potentially more than 100 million persons globally, being without income or having sharply reduced income for 2020. This impacts government tax revenues and will leave a gaping hole in fiscal budgets.
2. The revenue planning for these industries is set well in advance. The expense side of the ledger continues, even when the revenue side ends. One cannot simply shut down the sectors and anticipate a full resumption of normal revenues upon an “all-clear”. Therefore, for both public and private firms, there will be a mismatch, and a bad one at that, at a minimum of two fiscal quarters. Losses will be exacerbated and could be shockingly large.
Banks and insurance firms will have several exceptionally challenging quarters ahead. Banks are talking up about how well capitalized they are as an industry, but until they said it, nobody was giving the banks more than a passing thought. Suddenly, analysts are asking themselves “just what is the potential exposure here” and the numbers are, at least theoretically, sobering. There are 340 million employed persons that will have more difficulty paying bills, servicing debts or making mortgage payments. Not all of them will have fiscal difficulties, but some certainly will, maybe a lot; those persons were never expected to be a risk at the outset of 2020. Insurance firms will be presented with massive claims bills from all fronts, possibly exceeding trillions in 2020, and they won’t want to pay those claims.
70% of the global economy is derived from service industries. Of that amount roughly half is in discretionary services. The entire consumer discretionary sector of the western economies in now on hold. Government budgets have not modelled the coming loss of tax revenues for 2020. To compound the collapse of the discretionary spending and the coming hold in government budgets, there is the immediate risk to human health, that being the capital required to stop the SARS-COV-2 from killing as many as 3.5% of those infected.
The economic punch is fourfold. A total and utter collapse in discretionary spending, for at least one fiscal quarter, looms. A massive shortfall in government revenues seems assured, due to lower tax remissions by sectors and individuals that were normally taxpayers. There could be heavy pressures on banks and insurers in the coming year, as bankruptcies ramp up. Finally, the direct cost of protecting the health of the globe, by governments worldwide will have to be met now, but paid for later.
If the planet were a business, 2020 will likely have a massive reduction in revenues and a massive increase in expenses until the smoke clears. Most major investment analysts are writing, timidly and without a shred of data to back their assertions up, that the world might see a 2% GROWTH rate in GDP for 2020. Take that with a grain of salt.
Expect a global recession of some magnitude from the SARS-COV-2 outbreak if the infection curve ramps up.