Is Coronavirus A New Black Swan for The Global Economy?
As the world awaits its full impact, many people are asking: Is coronavirus the 2020 black swan for the global economy?
In this article, we’ll explore the possible economic effects of the pandemic. But we’ll begin by asking whether it’s truly a black swan event at all. To answer that question, we’ll refer to the work of a world-leading expert on economic risks.
What is the Definition of a Black Swan Event?
Popular keynote speaker Nassim Nicholas Taleb is better qualified than most to offer a clear definition. Taleb is a Distinguished Professor of Risk Engineering, and Co-Director of the Research Center for Risk Engineering at New York University’s Polytechnic Institute. He also happens to be the best-selling author who coined the phrase ‘black swan event’ in his 2007 work ‘The Black Swan: The Impact of the Highly Improbable’.
As Taleb defines it, a true ‘black swan’ is an extremely rare event that leads to very significant consequences. Crucially, the event should not be possible to predict beforehand. (Although many analysts may claim to recognize precedents after the fact.)
Past Black Swan Events
Despite their rarity, there are numerous examples of black swan events in history. It’s helpful to look at these in order to understand how the coronavirus pandemic fits in.
The 2008 Financial Crisis
The collapse of the US housing market in 2007-2008 triggered the 2008 financial crisis. This event was a stand-out example of contagion in financial markets, and economies around the world were devastated.
It’s also the most obvious recent example of a black swan event in economics. Very few analysts predicted the crisis – and fewer still predicted its full global impact. Even among negative forecasters, the mainstream expectation was for a price ‘correction’ – not a crash
2008 also saw Zimbabwe suffer the second-worst case of hyperinflation in history, with a peak inflationary rate of 79.6-billion percent. Such extreme inflation is almost impossible to predict and inevitably leads to economic devastation.
The Dot-Com Bubble
A look back to 2001 reveals the bursting of the dot-com bubble as a black swan event. It had a similar outcome as the 2008 financial crisis, but was focused on the tech sector. When the bubble burst, the effect was great enough to bring down several investment funds.
After the event, many commentators observed that excessive speculation had led to inflated valuations unsupported by profits. But few raised such concerns in the late 90s, long before it was clear how hard e-businesses can be to monetize.
Other examples of Black Swans before Coronavirus
According to Taleb, there are other major Black Swan events in history that happened before the Coronavirus, and not all of them are bad. For example, Taleb describes the invention of the Internet as a black swan. Its invention, first for military purposes, was an extremely rare event that had major consequences for humanity. And no one, not even the greatest computer experts, could predict how much the world was going to change. The same thing happened with the invention of the personal computer. Inventions that, by luck or by chance, have profoundly changed the world in a totally unpredictable way.
Other classic examples of black swans are the 9/11 attacks, or the First World War.
Understanding Black Swan Events
It would be easy to attach a negative connotation to every black swan event in economics, but this is a very limited view. Many such events can be viewed as either positive or negative – depending on the perspective of the individual.
These sudden, unexpected events often bring opportunities to those able to profit from chaos. For instance, if the stock market has a disastrous day, an investor might find this a profitable time to exercise short options. Conversely, this same event would clearly be negative for an investor who had just bought heavily into the market.
Other examples are overtly positive. Taleb defines the invention of the internet as a black swan event, yet most commentators consider this a net-positive development – at least economically.
Preparing for Black Swan Events
A black swan event in economics has the potential to arise at any point in time. As these events cannot be predicted, the only way to prepare for their disruption is to build robust systems in advance.
Often, there is a false belief that existing techniques used to measure risk will prevent a black swan event. If this belief is widespread, such techniques may offer a false sense of security.
The rarity of black swan events makes them unpredictable. In turn, that unpredictability makes them an ever-present threat. Taleb argues that businesses must plan accordingly.
Antifragile: Things that Gain from Disorder is the follow-up to The Black Swan. In Antifragile, Taleb explains how businesses must go beyond being resilient or robust. An ‘antifragile’ organization will not only survive a black swan event, but will emerge even stronger from it.
Is Coronavirus a Black Swan Event?
‘Black swan’ has become something of a buzz-word as a result of the pandemic. Multiple reports have confidently defined coronavirus as the black swan of the global economy. But it pays to look a little closer before drawing firm conclusions.
The coronavirus pandemic meets two of the three points used in the definition of a black swan event – rarity and significance. But can it truly be considered unpredictable?
For more than a generation, prominent figures in the scientific community have warned that modern society is vulnerable to a global pandemic. What was less widely anticipated was the speed of its spread.
However, Nassim Nicholas Taleb was among the few who predicted a pandemic with an exceptional pace of contagion:
As we travel more on this planet, epidemics will be more acute — we will have a germ population dominated by a few numbers, and the successful killer will spread vastly more effectively. I see risks of a very strange acute virus spreading throughout the planet.
These chillingly accurate words form part of Taleb’s 2007 work The Black Swan.
More recently, Nassim has said explicitly that coronavirus is not a black swan. Instead, he classes it as a white swan. (This term defines the event as something which we knew would happen eventually – and which was almost inevitable given a sufficient timespan.)
Taleb has also noted that President George W Bush warned the US to prepare for a pandemic back in 2005. 10 years later, Bill Gates famously gave a TED speech titled The Next Outbreak? We are Not Ready:
Economic impacts of Coronavirus (COVID-19)
Of course, many economists will consider the question ‘is coronavirus a black swan’ to be a purely technical point – at least in the short term. For most, the focus is squarely on its real-world effects.
So far, the economic impacts of coronavirus are playing out in a haphazard fashion:
The Stock Market
The March collapse of major stock markets was deeply predictable (although the scale of the losses was shocking). Less predictable was the resurgence seen on the US exchanges.
After shedding almost 11,000 points from mid-February to late March, the DOW Jones had virtually recouped these losses by June. So far, it has held its near-record values throughout the summer of 2020, even as the virus has taken hold across the US.
Many international markets have shown a more muted upturn. As an example, London’s FTSE 100 has seen a slower recovery in values during the same period. (This is in spite of a significantly lower incidence of coronavirus in the UK than the US.)
Effects on Key Sectors
Inevitably, certain key sectors have been hit harder than others by the economic impacts of coronavirus. Early casualties have included:
- Cruise operators
- Tour operators
- Public transport operators
- Hotels, restaurants, bars and cafes
- Events and entertainment companies
- Sports and games
- Visitor attractions
The economic impact of coronavirus is slowly trickling down into other areas of the global economy. Looking ahead, the ability of businesses to retain employees and the ability of homeworkers to sustain productivity could be key factors in the pandemic’s overall impact.
The Economic Effects of Lockdown
Most of the early economic effects of coronavirus were in fact symptoms of the widespread lockdowns. This led some economists to question whether the cure is worse than the disease. Outside the bubble of global economics, this debate has chimed with social commentators and ‘thinkers’ of our time.
Many observers have also raised alarm at the level of hysteria generated by intensive media coverage – especially during the pandemic’s early phase. Our keynote speaker Peter Diamandis, founder of the XPRIZE Foundation, blogged on the topic of coronavirus fear vs reality, while YouTube influencer and keynote speaker Prince Ea clearly identified fear as the greater threat.
Ending the Pain: The Race for a Vaccine
Governments across the globe have shown an unprecedented willingness to shut down their economies to protect public health. Against this backdrop, the development of a coronavirus vaccine may prove the only way to begin healing the economic pain.
As we write (August 2020), two vaccine development programs lead the charge:
- Researchers at Oxford University, England, lead Western efforts. Live testing began in late June in hard-hit Brazil.
- A Russian-developed vaccine is set to enter phase-3 trials (mass testing) and is publicly backed by Russian President Vladimir Putin. However, Western countries has voiced some safety concerns.
Beyond the technical issues of vaccine development, the logistical challenges of manufacture, distribution, and administration loom large… The virus isn’t beaten yet and the road ahead may hold many surprises.
The best keynote speakers on Coronavirus and its economic effects
We began with the question ‘Is coronavirus a black swan event?’ Whichever conclusion we reach, there has never been a more appropriate time to discuss this poignant issue.
At Aurum Speakers Bureau, we are fortunate enough to represent a world-class array of economics speakers, healthcare speakers, and political speakers (among many others). Between them, our expert orators are able to shed light on every angle of the coronavirus pandemic and its effects.
We also work and engage Nassim Nicholas Taleb – author, speaker, academic and the creator of rules on decision-making in a world we don’t fully understand.
Taleb’s keynote speeches include Black Swans – Living with the Highly Improbable, and Antifragile – Things that Gain from Disorder. Both speeches address timely and pertinent issues. Notably, we recently ranked Taleb as the world’s top virtual keynote speaker – a worthwhile consideration if you’re seeking an alternative way to hold an event.