The emergence of COVID-19 is posing a devastating threat to the global economy. When the first cases of pneumonia-like etiology were reported to the World Health Organisation (WHO) at the end of 2019, no one could have anticipated that the situation would evolve into an epidemic crisis of global scale. The novel coronavirus – officially named COVID-19 – is rapidly spreading from its epicentre in Wuhan to the rest of China and the world, surpassing the impact of the 2002 SARS-CoV and 2012 MERS-CoV outbreaks. There have been more than 70 thousand confirmed cases and 1,775 deaths as of 17 February 2020.
China undoubtedly is bearing the most direct and severe impacts of the epidemic. The giant export-driven economy is almost paralysed when not only production but consumption and other social activities turn to hibernation with no obvious prospect for return. The epidemic has caused multiple direct consequences besides the human cost. Commercial losses or projection thereof have been reported across all sectors, from retailers, restaurants, cinemas, transport providers, hotels, etc…
It hasn’t taken long for the global economy to feel the effects. The second-largest economy in the world by GDP naturally has a strong impact on the global outlook. Disruptions in various business sectors have spread beyond China’s borders. The crude oil price has dropped by 20 per cent over the past month to hit its lowest level in more than a year, reflecting, among other factors, declining demand from the largest market, China. However, the most affected industries and sectors will be travel, tourism, and retail. Closed borders, travel bans, cancelled flights, suspended business operations and activities are just some of the symptoms. It is still too early to tell the likely economic effects of coronavirus on the national and global scale. In the worst-case scenario, Bloomberg Economics forecasts that Chinese economic growth will fall by 1.5 percentage points, while the global economy will grow 0.4 percentage points less, in comparison to pre-virus projections.
The outlook for global supply chains is gloomy. Longer and multiple-actor supply chains mean higher susceptibility to disruptions, while just-in-time (JIT) processes might just have made the manufacturing sector’s challenges that much greater when a supplier link closes. China’s entire supply chain has come to a halt as factories announced closures with no prospect of opening soon. China, dubbed “the factory of the world”, holds an important position in the supply chains of hundreds of major manufacturers. Wuhan alone hosts more than 500 key industrial facilities for production, R&D, and logistics across all industry sectors, from automobile, hardware, and electrical equipment to consumer products. The virus has already translated into fewer exports, which affect the many manufacturers that are dependent on China for their intermediate goods. Countries particularly vulnerable include the US, EU member states, South Korea, Japan, Brazil, Australia, etc. In early February, Foxconn, Robert Bosch GmbH, Honda Motor Co. Ltd. and Nissan Motor Co. Ltd had to close their China-based facilities. Nike Inc., Starbucks, and Ikea have also halted their Chinese operations.
Investment will also be affected. There have been some concerns that the epidemic can lead to a relocation of foreign investment outside of China, should the epidemic outbreak last too long and the authorities do not curb the rates of new infections. There is, however, no reason to expect sustained structural damage to the economy arising from the virus at the moment.
Being unprecedentedly strong in its spread, the coronavirus is just one of the many disruptors in the world of trade. Companies need to put in place the right measures and alternatives to minimise the impact of various disruptors on their businesses and supply chain.
Paul Baker is the Founder and CEO of International Economics Consulting (IEC) Ltd. At IEC, we provide essential tools to simulate and assess the impact of various disruptors on your business. We can help to devise business strategies to enhance your international competitiveness by drawing on our experience advising in over 80 countries around the world.