Deriving a relationship between Coronavirus and Global Economy

What is Coronavirus? Where did it originate from? Why is it considered to be a serious issue?

Coronavirus is a cousin of the severe acute respiratory syndrome (SARS) virus that had its outbreak in Wuhan, China and is now spreading throughout the world. The common symptoms for the virus include fever, breathlessness and possible lesions on the lungs. The primary source of the virus is said to be through animals and it is said to be contagious among humans even by simple contact, which is the reason why millions of people are in partial or complete quarantine in Chinese cities. Over 17,000 people have been infected with the virus and it has been responsible for 362 deaths in China and dozens of cases have been confirmed in numerous other countries as well.

What has changed after the SARS outbreak of China?

The historic example of the SARS outbreak of China (2003) is taken as a prototype and possible implications for the coronavirus are derived from it. However, in 2002, China was the sixth-largest economy in the world while today, it is the second-largest. It is called the world's factory and plays a key role in global supply chains. Today, China has a massive impact on the world economy that must be considered while assessing the impact that the virus outbreak could have on the global economy. Anything that happens to China’s economy has an amplified impact on the rest of the world. The global cost from SARS was estimated at $33 billion, or 0.1% of world GDP in 2003, while the estimated costs for fighting the coronavirus is said to be about $40billion.

What were the effects of WHO’s declaration about Corona as an emergency?

World Health Organisation (WHO) has declared Corona as an ‘International Public Health Emergency’. Declaring an emergency implies that the WHO considers the disease to be a serious global threat and will dispense international resources to curb it. The declaration was issued as an effort to stop the virus from spreading in countries that do not have adequate health resources like China that would be required to tackle the issue. The declaration did not impose any direct restrictions on businesses. Later, WHO specifically emphasized that it doesn’t recommend any new limits to trade or travel, including border closures, traveller quarantines, and visa denials. Countries can, however, impose their own travel restrictions. Consequently, The Dow Jones Industrial Average had dropped to 244 points in midday trading on 30th January and recovered back to a 125-point gain when the WHO decided against recommending travel bans to China. This also explains what travel restrictions could do to China’s economy.

How has Coronavirus impacted China’s Economy?

Travel, tourism and hospitality are the immediately affected sectors, while manufacturing is likely to suffer in case the situation is not under control soon

Movement of any individual from or to the industrial city of Wuhan and any form of internal transport in the city of Wuhan is highly restricted. Wuhan is a hub of 11 million people, who are under quarantine. Even during the period of Lunar New Year, people can barely be seen in restaurants or on the streets. Local brick and mortar stores of China have suffered immensely in this holiday season. If grocery stores are shut, perishable items will eventually be subjected to spoilage or decay and local businesses will have to bear the cost. A Public congregation could increase the spread of the virus. To this end, several organisations including McDonald’s, Starbucks and hotels have also chosen to shut selected outlets to prevent the virus from spreading.

Stocks in mainland China plummeted nearly 9% on Monday (i.e. 3rd February 2019) as they returned to trade after following an extended holiday amid the ongoing virus outbreak. It is speculated that the primary reason for this is the absence of resumption of work by the people of China after the extended Lunar New Year holiday, despite several measures like work from home other alternatives by companies to operate during the outbreak. It was suspected that this would lead to low productivity but has shown increased efficiency owing to a more comfortable work environment and less number of breaks. Although, if the situation is under control soon, the lost grounds could be made up in some time.

Even though researchers are constantly working towards finding a preventive measure/cure to the virus, the profound uncertainty has caused the markets to be highly volatile. It is said to remain the same until some clarity about the gravity of the issue is received and until the outbreak has subsided. It has also caused a major decline in China’s tourism and is said to further affect the tourism industry adversely owing to the same uncertainty among foreigners and the travel restrictions put forth by several countries. This has resulted in a significant reduction in airplane fares, which has affected the tourism industry. In 2003, SARS was responsible for a loss of about 8 percent of revenues to the airlines that worked in the Asia-Pacific region. The losses even reached 35% at the worst of the outbreak.

The outbreak is estimated to cut China's first-quarter growth by 0.5 to 1.5 points from the projected 5.9% growth rate.

What are the implications of coronavirus on a global scale?’

A supply chain is the network of all the individuals, organizations, resources, activities and technology involved in the creation and sale of a product, from the delivery of source materials from the supplier to the manufacturer, through to its eventual delivery to the end-user.

China accounts for about 20 percent of the global manufacturing output. Most businesses around the world that are dependent on foreign supplies do not stockpile these goods regularly because they consider supply chains to be highly reliable. If that schedule is disrupted, it could hurt international businesses because even in the best case, it will be very difficult to meet their commitments. Industries that are dependent on components from China could struggle with prolonged quarantines. That could affect industries like electronics, furniture and medical machinery.

After some intense bilateral negotiations between the USA and China, they finally inked a ‘phase one’ deal thereby settling the ‘trade war’. The deal promised billions of dollars’ worth of agricultural transactions and reforms to China’s existing mandatory technology transfer.

Under the terms of the ‘phase one’ deal, China has promised to increase its U.S. purchases by $200 billion which was said to be unrealistic. Even in the best of circumstances China purchasing commitments would be difficult to reach. Quarantines, cancelled flights, and declining business will make it all the more difficult for China to meet those goals. White House trade adviser, Mr. Peter Navarro told CNBC that the outbreak would not cause the United States to loosen its tariff regime on the country, even if it dragged down Chinese growth.

China is the world’s biggest oil importer and the locked-down city of Wuhan, where the virus emerged, is one of its key oil and gas hubs. Two big Saudi customers, China National Chemical Corp. and Hengli Petrochemical have reduced their purchases.

Multinational companies are already being affected, with airlines cancelling flights to China and other companies restricting travel to the country or warning of disruptions to their supply chains. The world was recently experiencing an economic slowdown. However, by the end of the previous year, it began to stabilize even in China. This virus might disrupt the stabilization trend.

Conclusion

If the virus is contained early, then the economic loss will be compensated in the long run and it wouldn’t affect the world economy at a significant level. Many economic activities like travel and purchases from factories can be postponed rather than cancelled altogether in-case the situation stabilizes early. Although, if the virus is not contained quickly, then losses will get piled up on every account sheet and companies will have major changes in strategies, inflate costs, and reduce global tourism which might even lead to a world recession. It could also accelerate the return of jobs to North America or even Mexico for that matter. It could show us a slight shift of power for the manufacturing industry. China believes that it might be better to have a short-term quarantine and have high short-term economic costs than to have a longer-term where people are concerned about diseases floating around.

Interesting Fact – People have been confusing Corona beer with the deadly virus. Online searches for ‘corona beer virus’, ’beer virus’ and ‘beer coronavirus’ have risen by 2300%, 744% and 3233% according to google trends.

---