How Coronavirus Could Impact the World’s Economic Supply Chain

How Coronavirus Could Choke the World's Economic Supply Chain
Photo by Tore F on Unsplash

As health officials around the world struggle to contain the spread of coronavirus, which originated in Wuhan in the Chinese province of Hubei late last year, another potentially devastating global crisis appears to be following in its wake. Although we assume that the outbreak will be successfully contained, the ensuing economic impact will undoubtedly be felt around the world.

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Coronavirus is a member of a virus subgroup known for its potential to cause death in mammals and birds. Contraction by humans most often occurs after exposure to airborne droplets and fluids from those already infected. The most notable examples of this virus subgroup are severe acute respiratory syndrome (SARS) and Middle East respiratory syndrome (MERS), both of which caused several hundred human deaths during their respective outbreaks.

Containment within China seems to be a long way off and elsewhere, hopes that the spread could be mostly contained are fading. Italy, second only to China in terms of infections is on lockdown and the United States has already reported 279 deaths.

Similar to SARS but Worse

Comparisons are being made with the 2003 SARS outbreak, although, in terms of casualties, coronavirus’s 11,949 deaths have far eclipsed the SARS total of 774. From an economic standpoint, it also seems as though coronavirus will be far more devastating.

In early 2003, the SARS outbreak resulted in an immediate 2 per cent drop in China’s economic growth from the first quarter to the second, from 11.1 per cent to 9.1 per cent. By the third quarter, the outbreak was contained, and economic growth climbed back up to 10 per cent.

Back then, the hospitality, tourism and entertainment sectors, which contributed 42 per cent of China’s GDP, were most directly affected by travel bans and other measures. However, a lot has changed in 17 years, and currently, these sectors account for 54 per cent of China’s GDP.

Therefore, it seems as though China should prepare to be hit much harder this time around.

The Heart of the Issue

The changing economic landscape over the past 17 years has made the rest of the world as vulnerable as China for one reason: the global supply chain.

The biggest economic event between the SARS and coronavirus outbreaks was the global economic meltdown of 2008-09, which prompted businesses all over the world to tighten up their processes and operate more efficiently. This resulted in many businesses seeking a more affordable supply base in China to help bolster their bottom line.

Consequently, much of the world is now far more dependent on one manufacturing region within Hubei province than it was back in 2003, and China now stands as the largest global exporter of manufactured goods to be resold or used in other types of manufacturing. In the period from 2005 to 2015, global reliance on those products doubled to 20 per cent; in that same time frame, China’s economy skyrocketed from 4 per cent to 16 per cent of global GDP.

On February 5th, Moody’s Investor Services issued a statement analysing the potential economic ramifications of the coronavirus outbreak: “Global companies operating in the affected area may face output losses as a result of the evacuation of workers. Companies operating outside China that have a strong dependence on the upstream output produced from the affected area will also be under pressure because of possible supply chain disruptions resulting from temporary production delays.”

Simply put, the drastic measures needed to contain the coronavirus outbreak could choke the world’s economic supply chain.

Direct Economic Impact to Date

Perhaps the most direct hit has come in the form of free-falling global stock markets. The Dow Jones plummeted by more than 2,000 points on March 9th, marking the largest single drop since the financial crisis.

In terms of industry, travel and tourism in China were first in the line of fire after many airlines stopped running flights in and out of the country. However, as Chinese tourists account for a huge chunk of revenue for many counties around the world, this could have severe economic consequences globally. Oxford Economics has predicted that the US alone will experience a loss of 1.6 million visitors from mainland China this year.

Unsurprisingly, China itself has felt an immediate economic impact as a result of the outbreak. The country’s prolific automobile manufacturing industry has been hit swiftly and forcefully, with manufacturing plants for industry titans such as Volkswagen, Toyota, General Motors, Honda and Hyundai ordered to remain closed following the Chinese New Year holiday. This will result in a 15 per cent drop in production for the first quarter of 2020 alone, according to S&P Global Ratings. Hyundai has also closed one of its South Korean plants due to a shortage of auto parts.

Consumer demand for luxury items has also plummeted, which again is unsurprising for the epicentre of a fatal virus outbreak. British luxury brand Burberry has been hit particularly hard and has now closed 24 of its 64 stores in mainland China.

Meanwhile, in the technology sector, smartphone chip manufacturer Qualcomm is facing potentially rocky times considering that nearly half of its 2019 revenue came from China in the form of smartphone manufacturing and sales. Apple has already reported a steep decline in visitors to its retail stores in China.

Regions outside of mainland China have not escaped the initial economic impact either, with officials in the Chinese city of Macau closing 41 casinos for at least two weeks in a move that will cost Wynn Resorts between $2.4 and $2.6 million every day.

Impossible to Predict

The overall global economic impact of the coronavirus outbreak will ultimately depend on how long full containment takes to achieve. According to Neil Shearing, Group Chief Economist at Capital Economics, “The outbreak has the potential to cause severe economic and market dislocation. But the scale of the impact will ultimately be determined by how the virus spreads and evolves, which is almost impossible to predict, as well as how governments respond.”

Considering the number of variables at play and the globalised nature of the world’s economy, there is no real way of knowing exactly how this will play out. The most important thing for any business with connections to China is to look for ways to diversify their supply chain immediately.

This is something industries will likely look into in an effort to avoid future instances of this “perfect storm” in which the global supply chain relies on a country with a track record of being an incubator of deadly contagious diseases.