How will the coronavirus outbreak impact the global economy?
The outbreak of Covid-19, as the disease is officially called, is crippling supply chains, sapping sales of certain goods, throwing transportation into turmoil, alarming financial prices, and heightening expectations of a global recession.
There is still so much we don't know about coronavirus, which leaves the future economic implications very unpredictable for both China and the rest of the world. It is also impossible to fully distinguish one factor— in this situation, a virus outbreak — from something else that occurs in the world that can ratchet up stocks or pressure economies. It is also impossible to determine how large, long or widespread any economic effect would be. But it is obvious from how crazy stocks are responding, and from the government's response that the planet is on the verge of a possible coronavirus-slowdown.
In some aspects, the 2020 pandemic looks a little like the crisis that spread through the globe in 2008, where the threats that undermined economic recovery could be tracked back to mortgage-backed securities and other speculative loans. Since then, the entire environment of the workplace has changed to the freelance economy and online networks that put employers and practitioners together.
China makes up a much greater share of the global economy than it did in 2003, when SARS, another form of coronavirus disease, broke out. Today, businesses like Apple and Nike and other manufacturers and corporations around the world are now acknowledging that they experience the negative impact of the epidemic and most of them have even announced closing down their factories and stores. Luxury brands producers, who rely on Chinese customers who spend a lot of time at home and on vacation, have also been affected. Luxury fashion brands in particular, which are highly dependent on Chinese consumers, are reaching. The investment consulting firm Bernstein's study showed that the coronavirus could end up losing the luxury industry as much as $43 billion in revenue in 2020, says Business Insider.
Dozens of global airlines have slashed flights to and from China. Major institutions and banks have cut their forecasts for the global economy, with the Organization for Economic Co-operation and Development being one of the latest to do so.
Overall, it was a bruising year for China. A trade war with the United States left its economy expanding at the slowest pace in 30 years. Analysts predict that 4 million jobs might have been lost in 2019. The coronavirus epidemic has already been identified this year, killing thousands and infecting thousands more, putting a brake on China's economy.
To make matters worse, the illness travels exponentially across the world, with countries like Italy, Iran and South Korea registering more than 7,000 cases each. Other European countries, such as France, Germany and Spain, have also seen a recent surge of more than 1,000 cases.
The vulnerability to multinational supply chains is far more alarming. Qualcomm (QCOM), the world's largest supplier of mobile chips, warned that the epidemic created "major" concern about the market for smartphones and the supplies required to produce them. Auto parts shortages have also prompted Hyundai (HYMTF) to close plants in South Korea and led Fiat Chrysler (FCAU) to make contingency arrangements to prevent the same outcome at one of its plants in Europe.
The epidemic has prompted large companies and banks to that their estimates for the global economy. The Organization for Economic Co-operation and Cooperation is one of the most recent organizations to do so. In its March report, the OECD reported that it had downgraded its 2020 growth prediction for almost all economies.
According to the survey, China's gross domestic product performance was the biggest downgrade in magnitude. The Asian economic giant is projected to rise by 4.9% this year, which is slower than the previous estimate of 5.7%, according to the OECD. Elsewhere, the global economy is predicted to expand by 2.4% in 2020—down from the 2.9% estimated earlier, the study said.
In other words, the entire planet has to suffer economically. Of course, the situation differs from state to state because not all countries have applied increased or critical measures, and daily activities can still be present. In our country of origin, Romania, education has been suspended for an unknown period of time, cultural activities as well, and recently restaurants and venues have also announced their closure. Several companies have decided to send their employees home, in the idea that they can work remotely, or have had to fire them. At the moment, this creates many irregularities, because many employees can no longer receive their salary, since their managers do not produce anything to pay them.
If the epidemic lasts far into April, the number of individuals affected would be exponentially higher and customers and supply chains will not recover easily. Not only will there be a longer period of lower investment, but even what economists call "second-round consequences" will intensify the impact. For example, sustained disruption may lead to lower customer and company trust and lower spending across a wide variety of categories. Businesses hanging on to staff, looking for a transient benefit, might start sending them down, and families will have less money to spend.
It will be impossible to stop a full-fledged recession. Worse, long-term interest rates are now close to zero, seriously restricting the Fed's ability to improve the US economy. Fiscal policies, such as tax cuts on payrolls, may benefit, but what restricts spending at this period is not lack of resources, but lack of desire to spend.
In conclusion, whether investors are overreacting depends on the probability that the epidemic will continue. Markets also tend to expect the effects of the epidemic to last more than a few months. Nevertheless, resilience depends to a large degree on containment mechanisms and on our decision makers.