The Economic Impact of the Corona-virus

The human cost of the coronavirus outbreak is climbing across China and beyond. The economic cost is also mounting, mainly, but not only, in China.

That damage is, for the most part, not due to the virus itself so much as efforts to prevent it spreading.

There are strict restrictions on moving out of Wuhan, where the outbreak began, a city with a population of 11 million.

The lockdown, also now extended to other parts of Hubei province, prevents business-related travel as well as the movement of goods and workers. As of 5 February 2020 the virus has been reported in every Chinese province.

Fear of the virus also means many people will choose to avoid activities they think might expose them to the risk of infection.

So restaurants, cinemas, transport providers, hotels and shops are all quickly feeling the impact.

And the timing of the health crisis, during the lunar New Year break, means those industries have been particularly exposed to commercial losses.

The New Year holiday was extended for a few days by the national Chinese authorities and there have been longer extensions imposed by some provincial authorities, delaying the return to work for some businesses even longer.

Any delay resuming production and selling goods is likely to lead to cash-flow problems, especially for smaller operations.

Many companies will have to continue paying bills, including employees’ pay.

And for manufacturers selling goods abroad, there may be some issues with buyers becoming more reluctant to buy from China.

Herbert Wun, who owns Wing Sang Electrical, which makes products such as hair-straighteners and blow-dryers in Guangdong province, told BBC News, many companies will have difficulty taking this kind of financial impact, coming, as it has, with the US-China trade war.

And the epidemic “will add to the pressure on customers trying to shift their supply chain away from China”.

The impact is not confined to China.

International retailers have closed operations in China – the furniture seller Ikea and the coffee shop chain Starbucks, for example.

Several overseas airlines have stopped flights to China and international hotel chains have been offering refunds.

And beyond that, there is growing concern about integrated international supply chains.

China has a much bigger role in these networks than it did at the time of the last major health problem that emerged from the country – the severe acute respiratory syndrome (Sars) virus 17 years ago.

Hyundai, of South Korea, has suspended its car production because of problems with the supply of parts from its operation in China – an early warning sign of possible extensive disruption ahead.

China is an important supplier for the global motor industry and the electronics sector.

Many mobile phones and computers are made in China or at least have components manufactured there.

Many product we buy have component parts made in different countries. As those countries also falter many of these products will simply not be shipped and we won’t find them available in our local retail shops!

Financial markets have also felt the effect of the health crisis.

Stock markets around the world are lower than they were two weeks ago. China’s market fell 8% on the first day of trading after the holiday.

There has been a particularly marked impact on the prices of industrial commodities, as China is such an important buyer.

Crude oil hit its lowest level in more than a year.

It has dropped by about 15% in the past two weeks, reflecting declining demand from China – underlined by reports the country’s leading refiner, Sinopec, is cutting back.

A group of oil exporting nations is considering production cuts in an effort to reverse the price fall. As prices fall it become unprofitable for these oil producers to continue work. It’s actually better for them to shut down production and wait for prices to rise before resuming. This disruption in supply may lead to fuel rationing.

Copper is also cheaper – by about 13% over the past two weeks.

It is an important material for the construction industry, which is also sure to be affected in China.

Many of the suppliers of these commodities are emerging and developing economies. They have little financial pad to endure the losses. Industrial operations will lock their doors until the economic climate improves. Poorly paid workers will remain at home struggling to make ends meet.

It is too soon to attempt to quantify the likely economic effects. Much will depend on how well the Chinese authorities are able to contain the virus. Presently, a British lab has stated the virus population doubles weekly. At that rate the entire world will be severely affected. At that rate simple arithmetic indicates within 19-weeks everyone will have been affected! That would take us to the middle of May 2020.

But some forecasters have made rather tentative efforts to put some numbers on the impact.

One example is the consultancy Oxford Economics which predicts the Chinese economy will grow less than 4% in the first quarter of 2020 from a year earlier.

For the full year, the forecast is average growth of 5.6%.

For both figures, the previous, pre-virus forecast was 6%.

It also expects the global economy to grow slightly less – by 0.2 percentage points – than it would have done otherwise.

But Oxford Economic says this is all based on an assumption the “worst case scenario” will be avoided. So there is a risk of the economic damage turning out to be more severe.

Presently a British lab says the pandemic doubles in population each week! Something between 5% and 15% of those sickened will die. Surely this will be a world-changing event. Losing all the older, wise ones will be a terrible loss and many young people don’t realize yet how much the loss will cost us all! 

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