When the World Health Organization declared the outbreak of the Covid-19 pandemic on March 11, 2020, the disease had already wreaked havoc in large swathes of China and in Northern Italy. Which Businesses Will Covid-19 Disrupt and Why? At that point, 118,319 infections with the virus had been confirmed, and at least 4,292 people had died from the disease. What started as a new illness in a middling city in China had grown within a few months to a global public health crisis the likes of which had been unseen for a century. Stock markets around the world crashed. After an Oval Office address by US President Trump failed to calm markets on March 11, major stock indices fell another 10 percent on the following day. Even though governments rushed to stem the further spread of the virus, locking down entire regions and restricting (international) travel, and to support a suddenly wobbling economy, providing emergency relief measures and funding, it became quickly clear that the shock would leave few untouched. While the Covid-19 pandemic provides an extreme case, outbreaks of epidemic diseases are not without precedent in recent times and much can be learned about the resilience of the corporate sector from previous examples. However, given the extraordinary nature of the current crisis, these earlier experiences need to be carefully calibrated against the unique features of today’s challenge: existing models and policy remedies might no longer apply. In an effort to aid evidence-based policy responses, in our INET working paper we construct a time-varying, firm-level measure of exposure to epidemic diseases.
The measure we introduce is based on a general text-classification method and identifies the exposure of firms to an outbreak of an epidemic disease by counting the number of times the disease is mentioned in the quarterly earnings conference call that public listed firms host with financial analysts. Intuitively, the idea of constructing a measure of firm-level exposure to a particular shock from earnings call transcripts rests on the observation that these calls are a venue in which senior management has to respond directly to questions from market participants about the firm’s prospects. Not only are these disclosures therefore timely, but as they consist of a management presentation and, importantly, a Q&A session, they also require management to comment on matters they might not otherwise have voluntarily proffered. In most countries, earnings conference calls are held quarterly, which allows us to track changes in firm-level disease exposure over time. Indeed, we plan to continuously update our measures to reflect the impact of concurrent (Covid-19 related) events as they unfold. At the same time, we begin by using our approach to consider a given firm’s exposure to earlier significant epidemic diseases, namely SARS, MERS, H1N1, Ebola, and Zika. In addition to this exposure measure, we also construct measures of epidemic disease sentiment and risk. Doing so is important because it allows us to separate those firms which expect to gain from these events from those that expect to lose. While it might sound callous to talk about firms benefiting from a life-threatening disease as “winners,” we use these labels nevertheless for ease of exposition. Once we identify these winners and losers, we can then turn to the details of the conversation in their transcripts to systematically catalogue the reasons why they believe they can benefit from or are harmed by the outbreak.
Which Businesses Will Covid-19 Disrupt and Why?
Having constructed these new firm-level epidemic disease exposure measures, we document a set of empirical findings for the impact of outbreaks on firms in 71 countries. We present findings that are not just of interest in their own right, but which also help to allay any potential concerns about the validity of our measures. For example, we show that the time-series pattern of exposure to certain diseases follows the infection rates in the population of these diseases, consistent with the idea that investors are most concerned about the firm’s exposure when an outbreak is most virulent. Figure 1 depicts the time-series of the percentage of transcripts in which a given disease is mentioned in a quarter separately for Covid-19, SARS, H1N1, Ebola, Zika, and MERS, respectively (moving from the top panel to the bottom).11 Reassuringly, these patterns closely follow the infection rates for each of the diseases in the population. For example, SARS, according to the WHO, was first recognized in February 2003 (although the outbreak was later traced back to November 2002), and the epidemic ended in July 2003. Accordingly, discussions of SARS in earnings conference calls peak in the first quarter of 2003 and quickly trail off after the epidemic ends. SARS, which is also a coronavirus disease, starts to become a subject in earnings calls again in the first quarter of 2020, when it becomes clear that Covid-19 shares much in common with the former outbreak.
In order to assess the possible impact of the coronavirus on the economy, it is important not only to focus on the epidemiological profile of the virus but also on the ways that consumers, businesses, and governments may respond to it. COVID-19 will most directly shape economic losses through supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. And it will do so both in traditional, textbook supply-and-demand ways and through the introduction of potentially large levels of uncertainty.
Economists have been using the SARS epidemic to put the coronavirus outbreak in context. The 2003 SARS epidemic is estimated to have shaved 0.5 percent to 1 percent off of China’s growth that year and cost the global economy about $40 billion (or 0.1 percent of global GDP).The coronavirus epidemic, which like SARS originated in China, differs in a few key ways. China’s economy accounted for roughly 4 percent of the world’s GDP in 2003; it now commands 16.3 percent. If the coronavirus has a similar effect on China as SARS, the impact on global growth will be worse. Moreover, China’s growth is weaker than it was in 2003—after years of rapid economic development, China’s growth stands at 6 percent, the lowest it’s been since 1990. Its confidence had been shaken by the dual effects of general economic deceleration and the U.S.-China trade war escalation. Even before the epidemic, China’s Purchasing Managers’ Index was already showing signs of contraction. The February reading slowed from 50 to 35.7, a level in line with that of November 2008 during the global financial crisis. The economic fallout from the coronavirus could rattle China’s economy further and dampen global growth.
The coronavirus spreads more quickly than SARS, but, so far, seems to have a lower mortality rate. For its part, China responded more quickly to the coronavirus outbreak than it did with SARS, employing unprecedented confinement measures in areas such as Wuhan. These measures, while prudent, have created short-term economic pain on the supply-and-demand side.
Outside China, the outbreak has also affected global supply chains, as other governments have also taken immediate steps to slow the spread of the virus. The Harvard Business Review predicts that the peak of the impact will occur in mid-March, “forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the U.S. and Europe.” This again will disrupt global supply chains as well as demand for goods and services in the affected economies. These disruptions make it more difficult for companies in the U.S. and elsewhere to bring their goods to customers, and these companies will reduce exports from the U.S. to the rest of the world in the coming months.
With the spread of the coronavirus, the United States is facing a potential “black swan event”—an extremely rare and unpredictable incident that has potentially severe consequences. Therefore, it is important to act swiftly and in meaningful ways to minimize the fallout from this shock. Now is precisely the time for deficit spending: Low interest rates make it cheap and easy for the government to finance itself while limiting the potency of further monetary stimuli from the Federal Reserve. Therefore, it is incumbent upon the federal government to provide fiscal stimulus to ignite economic activity. In other words, the government needs to engage in sizeable spending and investment in key areas of the economy in order to increase economic activity; minimize disruption to the health and prosperity of the population; and to limit the effects on supply chains and the business sector. The five principles for economic policy action outlined in this report provide a roadmap for meaningful and decisive fiscal action that will help the economy regain its footing.