Coronavirus Is the Black Swan CEOs Have Been Dreading

As pandemics become the new normal, companies need to expect the unexpected

In a scenario-playing exercise last October, geopolitical risk expert Sam Brannen gamed out what would happen if a massively contagious coronavirus erupted and went around the world. Central banks responded with interest rate cuts and governments with fiscal stimulus. Yet, global recession ensued as countries shut down their borders against the pandemic, entrenching a spiral of distrust, self-dealing and one-upmanship that forestalled any recovery.

In May 2018, the Johns Hopkins Center for Health Security held a similar exercise. In this one, a bipartisan cast of current and former U.S. officials confronted public panic and riots as a flulike pandemic called Clade X broke out. Eventually, the dead around the world totaled 150 million, including 15 million Americans, and the U.S. health system had been nationalized.

CEOs need to adjust to a new reality that pandemics are now a known unknown when scenario-planning their businesses.

For decades, U.S. businesses have pushed increasing parts of their operations abroad, building far-reaching enterprises and supply chains that, while returning unprecedented profit especially for the tech giants, have risked something unexpected going wrong. The Covid-19 virus is not technically a black swan — an entirely unimaginable event coming from nowhere—since for years experts have sought to prepare for a pandemic akin to the 1918 Spanish Flu, which killed 50 million people and infected a third of the global population. But Covid-19 may add up to the same thing, as the virus appears to be just the unexpected catastrophe experts feared. CEOs need to adjust to a new reality that pandemics are now a known unknown when scenario-planning their businesses. (In a note to its startup founders and CEOs today, the venture capital firm Sequoia, called Covid-19 the “black swan of 2020.”)

The context is a new look to the world, with people everywhere crowding into cities, traveling more easily and farther than they ever have, growing in population to 7.5 billion, and inexorably warming the planet. With the combination of these trends, “the threat of new emerging infectious diseases rises steeply,” according to a paper published last November at the Center for Security and International Studies.

“In many ways, we’re lucky that this virus is a warmup act for us. There’s more to come,” said Brannen, head of the risk and foresight group at CSIS. “And the lethality of future outbreaks could be far greater.”

In a dramatic move on Tuesday, the Fed cut interest rates by 0.5%. The action came amid volatile swings in the stock and commodities markets and pessimism among a number of economists who this week downgraded their forecasts for 2020 global GDP growth—some projecting a contraction because of the virus. G7 finance and banking officials issued a statement promising to act to safeguard the global economy, and the World Bank pledged $12 billion to help developing countries specifically.

The early fallout from Covid-19 is only a snapshot — and one dimension — of the layered future of business uncertainty that has already been unfolding across the globe.

But stock markets resoundingly rejected the attempts to becalm them. U.S. markets paused for a slight rise yesterday after the Fed’s announcement, then plunged into a massive new sell-off, finishing the day down about 3%. Some economists said the rate reduction even undermined Fed credibility because President Donald Trump had been haranguing the bank to do so, including on Twitter.

“Lower interest rates do little to make consumers and businesses feel substantially more confident about the future when a health crisis is spreading around the world,” Mark Hamrick, chief economist at Bankrate, said in a statement. “It also cannot address the hobbled supply chains, including manufacturing capability in China and South Korea.”

The early fallout from Covid-19 is only a snapshot — and one dimension — of the layered future of business uncertainty that has already been unfolding across the globe. Urbanization, globalization, and the growing ease of travel had been viewed as unadulterated wins for tech, services — all kinds of business. But the U.S.-China bloodletting and Trump’s America First policy have seriously undermined globalization, and now Covid-19 appears to be a harbinger of a profound long-term economic threat of pandemic viruses. In addition, climate change seems likely to increase the spread of mosquito-borne diseases such as Zika, according to a 2018 paper published in Reviews on Environmental Health.

For at least a year, the Trump administration has been pursuing a commercial decoupling from China, encouraging U.S. companies to shift their manufacturing operations to other countries, especially home to the United States. But analysts say COVID-19 could accentuate the pulling apart. Chester Spatt, a finance professor at Carnegie Mellon University, said the severe gyrations of the stock market reflect a recognition that COVID-19 “could have major economic effect.” That includes the shake-up of the Chinese economy, but also a hit to the travel and hospitality industries, such as the cancellation of more than a dozen huge annual corporate events and trade shows in and outside the United States. Among those called off because of the virus are Houston-based CERAWeek, one of the biggest energy events of the year, and the Mobile World Congress in Barcelona.

One of the hardest hit industries now, and probably in the future, is oil.

“There could be a disruption of the supply chain, a shock to supply and demand. If travel is shut down, the impact would be huge,” Spatt said. While companies like Zoom and Skype are widely used as virtual meeting places, “they are highly imperfect” compared with a face-to-face visit, he said. “They are not such great places to negotiate.”

One of the hardest hit industries now, and probably in the future, is oil. Since January, as the virus has taken a toll on business activity and travel, Brent crude prices have plunged 23% and are about $52 now. Bob McNally, president of Rapidan, an oil consultancy, compares the dynamic with the late 1990s, when prices crashed under $10 a barrel. “We are going to deal a roundhouse punch to an already-ailing shale [oil] sector. The supply side is going to get whacked,” he said.

The last oil price crash, in 2015, reverberated widely in the U.S. economy but not in the salutary way analysts expected. While low gasoline prices were a boon to motorists, 178,000 oil workers were laid off, and dozens of companies that do work for the industry lost business. The U.S. economy as a whole took a hit, said Ed Crooks, vice chairman of Wood Mackenzie. Global GDP growth dropped only slightly, to 3.5% in 2016 from 3.6% the previous year, but in the United States, it plummeted to 1.6% in 2016 from 2.9% in 2015.

This time, Covid-19 has damaged the industry, but it’s not clear that we are watching a rerun of the 2015 script in terms of effect on the overall economy, Crooks said. “The bottom line,” he said, “is that the coronavirus looks likely to have a significant impact on the world economy, and companies and countries that produce oil will be among the sectors that are hit hard.”