By Greg Ip 

The body's immune response to infection is often more painful than the infection itself. The same is true of epidemics and the economy.

As with terrorist attacks and financial crises, epidemics generate widespread uncertainty and sometimes panic. Government authorities and private individuals often respond by drastically reducing exposure to the shock, amplifying its global economic impact.

The stock market's steep drop on Monday reflected fears that as the coronavirus spreads to other countries, the reaction may be as draconian as it has been in China.

Based on health impacts alone, the coronavirus shouldn't be that big a deal for the global economy. As of Monday it had killed 2,618 people, mostly in China, where the rate of new infections appears to have peaked. By comparison, the Sichuan earthquake in May 2008 killed 69,000 or more without leaving any noticeable trace on Chinese growth.

The difference is that the breadth and severity of an earthquake's damage is much more confined and clear than a virus. And in this case, Chinese officials are taking no chances. They have locked down 60 million people in Hubei province, bringing economic activity to a virtual halt.

The U.S. has warned against any travel to China and banned entry for any non-American who has been to China in the past 14 days. In South Korea, the disease, while spreading rapidly, has so far killed fewer people than typically die of flu in a single day. Yet attendance at movie theaters throughout the country this year has already plunged 38% from a year earlier, Citigroup analysts noted: "Fear of the virus is spreading throughout the country, at a much faster rate than the virus itself."

Epidemiologists say there is no precedent for such a drastic response. The epidemic, which may develop into a pandemic if it becomes widespread in enough countries, is far larger than others such as SARS, which originated in Asia in 2002, or Ebola, which began in West Africa in 2014.

Since those episodes support for globalization in many countries has been replaced by demands for stronger borders. Authorities have fewer compunctions about raising barriers to trade and travel in the name of disease control. The epidemic is thus one more force working to undo globalization.

"Traditionally in public health, the interventions we know work to slow disease down are things like diagnostics, isolation at home or in the hospital, protecting health-care workers," said Tom Inglesby, director of the Center for Health Security at Johns Hopkins University. "Larger measures like things China has done have no precedent."

"There's a lot of speculation about effectiveness and about negative consequences, without historical data, of those kind of macro interventions, like locking down a city, banning travel from one part of the country, or from a country altogether," he added.

Lawrence Gostin, director of the O'Neill Institute for National and Global Health Law at Georgetown University, said, "We've lurched from complacency to panic and doing things that are overbroad and not evidence-based, with massive impact on the economy."

He said quarantining Americans who were in an active zone of contagion such as a cruise ship is reasonable. However, he added, "A total travel ban on all foreign nationals...which could easily expand without any prior notice, chills travel and commerce."

Estimates of the disease's economic impact are largely educated guesses.

Goldman Sachs, for example, projects a 0.8 percentage point hit to U.S. annualized growth in the current quarter from reduced tourism, exports and supply chain disruptions, with most of that reversed by year-end. But "risks...are skewed towards a larger hit because a change in the news flow could lead to increased risk aversion -- less travel, commuting or shopping."

Peter Berezin, chief global strategist at BCA Research, an investment advisory, estimated global growth would fall to zero in the current quarter and then rebound, for a full-year hit of about half a percentage point. But he also sketched out a more pessimistic scenario.

If the virus infected a billion people, as the swine flu did in 2009 and 2010, 20 million could die, he said. "Demand for most items other than necessities would seize up." The resulting recession would be as deep as 2008-09, though recovery would be much faster, he predicted.

The Federal Reserve could respond by cutting interest rates,. For now, Fed officials are monitoring the situation, wary of acting ahead of evidence of economic harm and amid predictions any hit would be temporary.Even if it cuts rates, but the effect would be limited. Rate cuts boost demand for goods and services, but the problem now is whether workers and firms can supply them.

After the Sept. 11, 2001, terrorist attacks, economic activity plunged from coast-to-coast amid a grounding of commercial flights and fear of more attacks. The Fed cut interest rates, but the absence of follow-on attacks did the most to restore confidence. Similarly, the Fed cut interest rates after Lehman Brothers failed in 2008, but it took a federal bailout to end the panic.

Another problem is that in both 2001 and 2007-08, the Fed cut by around five percentage points. At present, it can at most cut them by 1.75 points before hitting zero.

Finally, how other policy makers respond is a wild card. The U.S. and its allies cooperated in 2001 to defeat al Qaeda and in 2008 to contain the financial crisis. Today, that spirit of cooperation has been strained by trade wars and a greater willingness by the U.S. to act alone.

(END) Dow Jones Newswires

February 24, 2020 19:33 ET (00:33 GMT)