The Coronavirus Outbreak
Originating in China and migrating to Japan, Italy, and other nations, including the United States, the Novel Coronavirus (COVID-19) outbreak has created fear and legitimate concerns about the unknown. With no vaccine yet available to combat this virus, scientists and politicians are behaving predictably. There is a fine line between acting responsibly and inciting panic. That’s the possible link I see to the 2008 financial crisis—the mob mentality. While our underlying economic indicators are strong now as opposed to 2008, the fear of the unknown is what worries businesses and politicians alike.
Impact on the Economy
Clearly, it is still too early to determine the full impact of the virus on the U.S. economy, but given the effects on China and Japan, it is not encouraging—at least in the near term. Japan shut its schools down for a month. China’s businesses have come to a halt. The Louvre is temporarily shut down. Soccer matches in Italy have been postponed. Here in the U.S., some domestic companies have halted travel and postponed meetings, and many cities, like New York, have taken proactive steps to sanitize public transportation. One real test will be when the NCAA basketball tournaments are due to start later this month. Will fans be allowed to attend? Will the tournaments be delayed or even cancelled? And what about the industries deeply affected like airlines, cruise lines, theme parks, hotels, Broadway, and Vegas shows? So, it seems to me that best case we will experience is an economic slowdown. Worse case, as Chairman Powell of the Fed said, we could slide into a recession. The stock market had its worst week since 2008 last week, hinting at that possibility. It all depends on the extent and breadth of the virus and how we react to it.
What Can We Do to Minimize Impact?
The number one thing to do is NOT panic. Secondly, businesses and individuals have to be smart and cooperate with government officials in trying to contain the spread of the virus. Accordingly, we all should follow good hygiene and not go into the office if sick.
How Does This Affect Banking?
If businesses are shut down or go into a bunker mentality, loan demand naturally would fall as well. Also, with the Fed chopping interest rates, the spread that banks make on loans and deposits could narrow. So, a drop in volume and spread means the NIM (net interest margin) would take a hit, adversely impacting banks’ income. Fortunately, bank capital levels are strong. Investors will just have to adjust their earnings expectations until the storm blows over.
This is NOT 2008, but we need to be smarter this time and not panic in order to ride this wave out with controlled damage. Being responsible and proactive makes sense; inciting a panic mentality does not.