Recession Goes Viral

On today’s show I’m going to make a bold economic prediction, and its not a popular one.

I don’t frequently make large predictions, but this one seems obvious to me. I haven’t seen anything in the media talking about this as of yet.

I believe that we will see a global recession in 2020. The trigger for this recession is the outbreak of corona virus that has the city of Wuhan in China as the epicentre.

British Airways suspended flights to China today, and it remains to be seen if governments or other air carriers will implement travel restrictions.

Air travel is one of the most effective methods for transmitting illness. You have a few hundred people in close proximity for several hours with a high percentage of recirculated air. The older the aircraft, the more air is recirculated.

Even if infection isn’t transmitted on the aircraft, you have the possibility of infected persons exporting the disease to other parts of the world making it that much more difficult to contain.

The Spanish Flu pandemic of 1918 infected an estimated 500 million people and killed an estimated 50 million people. Think about it, the world had just experienced WW1, and all of the horrors of that multi-national conflict. It was the war to end all wars and hot on the heels of that, along comes a strain of H1N1 that killed another 50 million people.

Back in 2003, the SARS outbreak killed an estimated 800 people worldwide and it too had a high mortality rate.

A few years later in 2009, the so-called swine flu pandemic was another H1N1 virus. Remember, the world was already in recession in 2009. We were in the middle of the largest economic downturn since the great depression. So the impact of a downturn in the global travel and leisure industry was hard to measure. It was just more bad news on top of a mud puddle of bad economic news. There are no official estimates. Some economists estimate the impact of somewhere between 0.5% of GDP and 1.5% of GDP.

But here’s what we do know. After 911 in 2001 travel on a global basis was hit hard. It triggered a downturn in hospitality. People still took vacations at that time, but they were increasingly driving vacations that didn’t involve air travel. In 2001, the global airline industry was weak and were already forecast to have somewhere between $1-2B in losses. In the wake of 9/11, the industry losses grew to $11B and a portion of this was offset by government bailouts of the airline industry. Midway airlines shut down. US Air went into bankruptcy and United Airlines was on the brink of bankruptcy. The only profitable airline in the US that year was Southwest. In total, 13 airlines applied for relief under the stabilization act.

With the SARS outbreak in 2002-2003, the same thing happened. Travel numbers were down dramatically for leisure. Even business travel was restricted and business people held more video conferences than ever before. At the time, video conference technology was not nearly as widely used as it is today.

So here we are at the beginning of 2020. Several countries are working hard to develop a vaccine for the corona virus. It will be at least 6 months before a vaccine is approved for use in humans and still longer before it is manufactured and available in meaningful quantities. A lot can happen in the spread of the disease in 6 months. We have already 6,000 reported cases in Wuhan, an increase of 50% in about a week.

The virus is now reported in 17 countries. Containment is vitally important to prevent a global pandemic. This will affect global travel patterns. 

I’m going on record as saying that 2020 will experience a global slowdown in the travel industry that will be of sufficient magnitude to push most major economies into economic recession. This will have a ripple effect into other sectors of the economy.