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As the coronavirus continues to spread and the global death toll passes 3,000, hopes that the economic impacts would be limited look increasingly forlorn.
The Organisation for Economic Co-operation and Development has warned that the global economy faces its worst downturn since the financial crisis as new cases emerge in countries ranging from Iceland to Indonesia, Armenia to Andorra.
Already, the disease has led to cancellations of sporting events and conferences around the world, and events in Japan, where hundreds of passengers were quarantined on the Diamond Princess cruise ship for weeks, are likely to put off many existing and potential cruise ship passengers for life.
The spread of the virus may also have geopolitical implications, ranging from its potential for upending the US presidential election to challenging the authority of the Chinese communist party and President Xi Jinping’s iron grip on power.
Analysts at MSCI have looked at previous events for clues as to what the effect on the global economy could be, noting that even if the impact had largely been restricted to China, coronavirus was always likely to have far more of an impact than the SARS outbreak in 2003 and other previous events. “The reach of China in the global economy is up sharply from previous events,” said Mark Carver, global head of factor index products at the index provider. Not only is China a bigger market, it is also a much larger part of global supply chains.
“Countries like the United States depend on China for both Chinese goods (for direct consumption and as components for manufacturing supply chains) and Chinese consumers (for sales). This means that the pandemic’s economic impact will likely be substantially larger than that of SARS,” according to Think Global Health. “A world economy that is so dependent on China as an industrial lifeline is highly vulnerable to the economic disruption caused by the coronavirus outbreak in the country.”
China’s share of global trade has risen from 5% in 2003 to 11% today, without including indirect links through the global supply chain, added George Bonne, the group’s executive director of equity factor research.
The markets most exposed to China, and therefore to the coronavirus outbreak currently, are its neighbours – Singapore, Hong Kong, Taiwan, South Korea and Australia – which all have a share of more than 10% of their trade with China. But Japan, along with a number of European countries such as Germany, France and Switzerland, also have relatively high exposure – higher than the US’s 5% share of trade with its global rival.
The sectors most exposed to disruption in China caused by the virus are semiconductors, technology hardware, materials and consumer durables, because of the importance of China in the supply chains of these sectors. Retailing and real estate will also be hard hit, but the impacts are much more local.
Sports and entertainment, tourism, airlines and the shipping industry are all likely to see a significant slowdown as well, while oil prices are also depressed. Shipping association BIMCO says that “every week that China remains “closed” will mark a slowdown of economic growth. Seaborne trade is closely linked to economic developments in Asia and the effects are already felt in several different ways.
“Widespread factory shutdowns results in a slowdown of manufacturing and industrial production. The intra-Asian container shipping market, the largest in the world, will be the first trades to feel the fallout from the coronavirus if intra-Asian supply chains are disrupted. Secondly, the long-haul trades to North America and Europe will be affected.
“The virus illustrates just how dependent the world has become upon China with many supply chains deeply embedded into the country. Anecdotal evidence suggests that South Korean car manufacturers have started to reduce output due to supply shortage of Chinese goods,” it adds.
Reuters reports that economists expect China’s growth to slow to 4.5% a year in the first quarter, down from 6% in the previous three months and the slowest since the financial crisis, while Standard Chartered says that the epidemic could affect up to 42% of the country’s economy.
The International Air Transportation Association says that Chinese airlines are set to lose $12.8bn in revenue and the global cost to the industry is like to by $29bn.
There are fears that if a global pandemic is declared, it could cause stock markets to fall even further than they already have. “The spread of coronavirus strikes fear into the markets and reveals that the recent bull years are built on a very fragile foundation,” says Kim Fournais, CEO of Saxo Bank.
Yet there will also be winners from the crisis. Healthcare stocks will receive a boost for obvious reasons – not just pharmaceutical companies developing vaccines but providers of all health-related products and services – and there will also be gains for telecoms and tech companies as people look for ways to do business and leisure activities online rather than meeting in person.
And the crisis is also likely to see the emergence or consolidation of a number of new technological solutions ranging from chatbots for providing information to drones to deliver everything from medical supplies to takeaway meals.
Autonomous sterilization robots are helping hospitals to contain the infections in quarantined wards thanks to their ability to move into a quarantined zone to sterilize virus without human intervention. Chinese medical robot developer TMiRob deployed 10 disinfection robots across major hospitals in Wuhan to contain the spread of Covid-19, GlobalData reports.
And artificial Intelligence (AI) can be used to identify disease outbreaks as well as forecast their nature of spread. “Canadian start-up BlueDot used AI and machine learning to detect the coronavirus outbreak even before the Chinese authorities,” the research group says. “Its AI algorithm analyzed multiple sources such as news reports, social media platforms and government documents to predict the outbreak.”
Despite the overall negative dynamics between a coronavirus pandemic and economic growth, the potential of economic rebound in the immediate aftermath of the pandemic should not be overlooked, Think Global Health points out.
MSCI says that in previous outbreaks such as SARS, markets recovered fairly quickly as the virus faded but that it could take a few months for the economy to return to normality. “Normalisation in previous episodes happened after about four months,” said Thomas Verbraken, executive director for risk management solutions research at MSCI. “Once it’s clear the epidemic is behind us, macro conditions will re-emerge.”
However, when that will happen is extremely unclear. If the crisis is contained relatively quickly, the economic impact, while significant, will be short-lived. But if the virus persists, it could reduce the potential of the global economy to grow for years to come.
