Coronavirus: The Pandemic Stress Test

Apart from the direct impact on public health, a crisis of this magnitude can trigger at least two direct kinds of economic shock.

The first is a shock to production, owing to disrupted global supply chains. Suspending the production of basic pharmaceutical chemicals in China disrupts the production of generic drugs in India, which in turn reduces drug shipments to the United States.

The second shock is to demand: as people and governments take steps to slow the spread of the coronavirus, spending in restaurants, shopping malls and tourist destinations collapses.

But there is also the potential for indirect aftershocks, such as the recent plunge in oil prices following Russia and Saudi Arabia's failure to agree on coordinated output cuts.

As these and other shocks propagate, already stressed small- and medium-size businesses could be forced to shut down, leading to layoffs, lost consumer confidence and further reductions in consumption and aggregate demand.

Moreover, downgrades to, or defaults by, highly leveraged entities (shale-energy producers in the US; commodity-dependent developing countries) could lead to wider losses in the global financial system. That would curtail liquidity and credit, and trigger a dramatic tightening of the financial conditions that have hitherto been so supportive of growth.

Tourists wear masks as they stand at a check-in area of the Vaclav Havel airport in Prague, Czech Republic, 13 March 2020. The Czech government has banned all foreigners entering the country from 16 March 2020 and Czech people are not allowed to travel abroad due to coronavirus measures. Photo: EPA-EFE/MARTIN DIVISEK

The parade of horrible possibilities could go on. The more fundamental point to remember is that the...