Japan: In case of emergency

We have historical first-hand experience of how a virus can bring down an economy with SARS back in 2003. And while there are many differences between that epidemic and what is happening now, the principal mechanism remains the same.

Where many economic simulations are actually just a form of actuarial arithmetic, for example, the costs of crime, the costs of obesity on the economy and so on, that sort of approach fails with an epidemic like the coronavirus. It may well be that the numbers infected and the total death toll will look insignificant compared to a regular flu outbreak. Such flu epidemics annually affect tens if not hundreds of thousands, and the global death tolls can be very substantial. Yet apart from some of us getting a flu jab, they don't affect our behaviour much.

It may not be proportionate to the individual risk, but the fear generated by an epidemic like the coronavirus, coupled with the official response - quarantines, curfews, lockdowns and travel bans, can have a very substantial impact on economic behaviour, and most of it, negative.

When the fear of infection leads to economic retrenchment, by households, certain types of activity are typically shunned, The following, using Japan's household spending and income survey is not an exhaustive list, but shows the sorts of activities curtailed:

• Eating out (part of the food category - accounts for an average annual expenditure of about JPY152,000, out of the average total household spending of JPY3.3m);
• Recreational activities things like movies, theatre (part of the reading & recreation category - accounts for about two-thirds of the JPY350,000 annual spending of this category);
• Transport and communications - in particular, public transport, which accounts for about one-eighth of the total transport and comms JPY523,000 annual spending.
• Retail sectors such as clothes and footwear and furniture/household goods - together amount to about JPY270,000 annually. Online shopping may make up for some of these losses.

Of course, some other things get a boost. Medical care and medical products: Maybe in such environments, households are quicker to seek professional medical help in the event of sickness even if unrelated to the epidemic. Spending on preventative medicines, vitamins, disinfectant wipes and surgical masks, all may soar if stocks have not run out.

The average annual household spending on medical goods and services in the latest twelve months summed to JPY165,000.

It is thus a simple job to "shock" the consumer spending part of our GDP forecasts by cutting spending on the consumer services likely to be affected and providing an offsetting boost to medical care spending. In terms of the profile of the "shock", we are in February now, so if there is going to be a sizeable increase in Japanese coronavirus infection, it will probably take most of this month to emerge.

The onset of the warmer, drier northern hemisphere spring and summer typically makes it harder for such infections to persist. So an April peak followed by some moderation would seem a reasonable scenario

We can only guess the timing of any peak in infection and thereby the most intense impact on household spending, but the onset of the warmer, drier northern hemisphere spring and summer typically makes it harder for such infections to persist. So an April peak followed by some moderation would seem like a reasonable scenario. This leaves both 1Q20 and 2Q20 hit with progressively weaker spending in these areas before the recovery sets in.

But the recovery is unlikely to be "V-shaped", as sometimes is the case in the event of some other natural disasters, like an earthquake. Given the types of expenditure avoided, mainly services, there is unlikely to be much in the way of "pent-up" demand. For example, you don't take two bus journey's in May because you didn't take one in April. So the return to normality might be a relatively subdued one. Put another way, some of the expenditure lost, is lost forever.