Corona virus outbreak economy

coronavirus outbreak and the global economy

How the Coronavirus outbreak is affecting the global economy?

DISCLAIMER: We're commenting on USA and global COVID-19 response.

The coronavirus outbreak, which originated in China, has infected more than 550,000 people. Its spread has left businesses around the world, counting costs. This once-in-a-century pandemic is hitting a world economy saddled with record levels of debt.

COVID-19, the disease caused by the SARS-CoV-2 coronavirus, is spreading across the globe, leading to sharp market corrections and fears of triggering a global recession. Risks relating to the fallout from the spread of coronavirus pushed the Federal Reserve to cut the federal-funds target rate by 50 basis points on March 3, to 1%-1.25%, and President Donald Trump signed an $8.3 billion spending bill to fight the coronavirus on March 6. The virus emerged in China, where the government quickly weighed the economic and human costs of the rapidly transmitting new coronavirus and in January decided to focus on stopping the spread of the disease, regardless of the short-term financial hit. While responses beyond China are likely to be more measured, we expect to see school closures and recommended telecommuting as precautionary measures in the United States, given the recent rapid spread of the disease.

Though the Federal Reserve moved over the weekend to slash rates and buy treasuries, markets around the world fell on Monday anyway. The coronavirus threatens to set off financial contagion in a world economy with very different vulnerabilities than on the eve of the global financial crisis, 12 years ago.

The Debt

In critical ways, the world is now as or more deeply in debt as it was when the last big crisis hit. But the largest and most risky pools of debt have shifted — from households and banks in the United States, which were restrained by regulators after the crisis, to corporations all over the world.

As businesses deal with the prospect of a sudden stop in their cash flows, the most exposed are a relatively new generation of companies that already struggle to pay their loans. This class includes the “zombies”— companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt.

The dystopian reality of deserted airports, empty trains and thinly occupied restaurants is already badly hurting economic activity. The longer the pandemic lasts, the higher the risk that the sharp downturn morphs into a financial crisis with zombie companies starting a chain of defaults just like subprime mortgages did in 2008.

Overall, we see a weighted average hit of 1.5% to 2020 global GDP and 0.2% to long-run global GDP. We forecast a muted long-term impact because damage to productive capacity will be small, plus economic confidence should quickly return once the virus subsides.

Our long-term China GDP forecast is unchanged. We have lowered our 2020 China GDP forecast by 250 basis points, but we expect catch-up growth in the following years.

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We assume a global fatality rate in our base case of 0.5% among those infected, higher than seasonal flu and recent pandemics like the 2009 swine flu, but much lower than levels reported to date as diagnosis improves. We expect even lower fatality rates for developed countries and the working-age population.

We see the reason for optimism surrounding vaccines and treatments. We should see initial data from Gilead’s (GILD) redeliver by April; this drug could be a strong defence for patients with severe disease. Among vaccines, Moderna’s (mRNA) is the most advanced, but we don’t expect use until 2021.

As of February 2020, the number of people infected with the coronavirus Covid-19 has surpassed 80,000, with nearly 2,700 deaths. Efforts to contain the outbreak have led to full or partial quarantines of several Chinese provinces and cities, as well as other countries that have been hit. The movement restrictions that have been implemented currently affect 500 million people.

As the human costs in China and other countries continue to rise, the virus is also taking its toll on different industrial sectors – and subdued demand and disrupted supply across industries increase uncertainty over the global economy.

The coronavirus (COVID-19) outbreak has already brought considerable human suffering and significant economic disruption. Output contractions in China are being felt around the world, reflecting the key and the growing role China has in global supply chains, travel and commodity markets. Subsequent outbreaks in other economies have similar effects, albeit on a smaller scale.

The Outlook

On the assumption that the epidemic peaks in China in the first quarter of 2020 and outbreaks in other countries prove mild and contained, global growth could be lowered by around ½ percentage point this year relative to that expected in the November 2019 Economic Outlook.

Accordingly, annual global GDP growth is projected to drop to 2.4% in 2020 as a whole, from an already weak 2.9% in 2019, with growth possibly even being negative in the first quarter of 2020.

Prospects for China have been revised markedly, with growth slipping below 5% this year, before recovering to over 6% in 2021, as output returns gradually to the levels projected before the outbreak.

The adverse impact on confidence, financial markets, the travel sector and disruption to supply chains contributes to the downward revisions in all G20 economies in 2020, particularly ones strongly interconnected to China, such as Japan, Korea and Australia.

Provided the effects of the virus outbreak fade as assumed, the impact on confidence and incomes of well-targeted policy actions in the most exposed economies could help global GDP growth recover to 3¼ per cent in 2021.

A longer-lasting and more intensive coronavirus outbreak, spreading widely throughout the AsiaPacific region, Europe and North America, would weaken prospects considerably. In this event, global growth could drop to 1½ per cent in 2020, half the rate projected before the virus outbreak.

The coronavirus (COVID-19) outbreak has already brought considerable human suffering and significant economic disruption. In China, containment efforts have involved quarantines and widespread restrictions on labour mobility and travel, resulting in unplanned delays in restarting factories after the Lunar New Year holiday and sharp cutbacks in many service sector activities. These measures imply a sizeable output contraction while the effects of the outbreak persist. Subsequent outbreaks in other countries, including Korea and Italy, have also prompted containment measures such as quarantines and border closures, albeit on a smaller scale.

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world economy drop corona

The Consequences

The adverse consequences of these developments for other countries are significant, including the direct disruption to global supply chains, weaker final demand for imported goods and services, and the wider regional declines in international tourism and business travel. Risk aversion has increased in financial markets, with the U.S. 10-year interest rate falling to a record low and equity prices declining sharply, commodity prices have dropped, and business and consumer confidence have turned down.

Before the COVID-19 outbreak, activity data remained soft, but survey indicators had begun to stabilise or improve in both manufacturing and services. Financial conditions had also strengthened following moves to increase monetary policy accommodation and reduce trade policy tensions. Preliminary estimates suggest that global GDP growth slowed further in the fourth quarter of 2019, to just over 2½ per cent (at an annualised rate on a PPP basis), with strikes, social unrest and natural disasters affecting activity in several countries. Growth remained close to the trend in the United States. Still, demand fell sharply in Japan following the consumption tax increase in October and stayed weak in economies strongly exposed to the slowdown in global trade, including Germany.

Growth continued to be subdued in many emerging market economies, with GDP growth slowly easing in China and large non-performing loans and over-leveraged corporate balance sheets weighing on investment in India. Industrial production continued to stagnate in late 2019, and the growth of consumer spending lost momentum despite continued steady employment gains. The pace of the decline in global car sales moderated through 2019. Still, demand has subsequently tumbled again, with provisional data suggesting a monthly decline of 10% in sales in January 2020, with a 20% decline in China.

Global trade also remains very weak. Merchandise trade volumes contracted in the fourth quarter of 2019, and declined in 2019 as a whole, the first calendar year fall since 2009. Container port traffic and air freight traffic were also weak ahead of the coronavirus outbreak, and further sharp falls seem likely in the near term. Survey measures of manufacturing new export orders had begun to turn up but fell back in the flash PMI surveys for February, particularly in Japan and Australia. Investment data are also soft, held back in part by continued high uncertainty and weak expected future growth. Aggregate investment growth in the G20 economies (excluding China) slowed from an annual rate of 5% early in 2018 to only 1% last year.

Since the outbreak in January, close to 85,000 people have been infected worldwide, with a fast-rising share of these outside China. The epicentre of the outbreak was in Hubei province, which accounts for about 4.5% of China’s output, but the effects have been quickly apparent throughout China with efforts to control the spread of the virus leading to wide-ranging restrictions on passenger transportation, labour mobility and hours worked. Available indicators for February point to significant declines in activity inside China and the tentative signs of a mild improvement towards the end of the month appear unlikely to be rapid enough to prevent the level of output in the first quarter of 2020 being lower than in the fourth quarter of 2019.

Affect on Businesses

Production declines in China have been quickly felt by businesses around the world, given China’s critical role in global supply chains as a producer of intermediate goods, particularly in computers, electronics, pharmaceuticals and transport equipment, and as the primary source of demand for many commodities. Temporary supply disruptions can be met by using inventories, but inventory levels are lean due to just-in-time manufacturing processes, and alternative suppliers cannot easily be obtained for specialised parts. A prolonged delay in restoring full production in affected regions would add to the weakness in manufacturing sectors in many countries, given the time it takes to ship supplies around the world. Travel restrictions and the cancellation of many planned visits, flights, business and leisure events are severely affecting many service sectors. This is likely to persist for some time.

Worldwide, Chinese tourists account for around one-tenth of all cross-border visitors, and one-quarter or more of all visitors in Japan, Korea and some smaller Asian economies. Exports of travel services to China, including spending by Chinese visitors, are also significant in many countries. The virtual cessation of outbound tourism from China represents a sizeable near-term adverse demand shock. This is already apparent in many destinations; visitor arrivals in Hong Kong, China in February were 95% lower than usual. If the spread of the coronavirus outbreak affects visitor numbers more widely across the major economies, there would be sizeable costs, with tourism accounting directly for 4¼ per cent of GDP in the OECD economies and almost 7% of employment.

Growth could be weaker still if downside risks materialise. In the near-term, the significant downside risk is that the impact of the coronavirus proves longer lasting and more intensive than assumed in the projections. If outbreaks spread more widely in the Asia-Pacific region or the major advanced economies in the northern hemisphere, the adverse effects on global growth and trade will be much worse and more widespread. Illustrative simulations of this downside risk scenario suggest that global GDP could possibly be reduced by 1½ per cent in 2020, rather than by ½ per cent as in the base-case situation. A larger decline in growth prospects of this magnitude would lower global GDP growth to around 8 | 1½ per cent in 2020. It could push several economies into recession, including Japan and the euro area. The overall impact on China would also intensify, reflecting the decline in key export markets and supplying economies.

Global economy dropping Corona Virus

Affects on the United States

The impact of the novel coronavirus is rippling through the U.S. and global economies. Still, it could take a few months to fully see the fallout in data that tracks economic performance around the world.

So far, the virus has had a muted effect on data. Still, most private-sector and government economic surveys were conducted before concerns of the infection’s potential economic impact rose in late February. On Wednesday, for instance, the Labor Department’s consumer-price index largely showed price changes for goods and services before the coronavirus spread in the U.S.

In the coming months, everything from employment to gross domestic product and inflation will reflect the coronavirus’s effect on business and consumer activity. Some of the most timely measures to watch in the near-term are U.S. jobless claims, consumer-confidence surveys and purchasing-managers surveys because they are released with short lag times after the data is compiled.

Of course, the length and depth of the virus will determine how much it throws the U.S. economy off course. Economists from IHS Markit expect the virus will hurt the U.S. economy but not drive it into recession. The data firm projected 1.8% annual growth in 2020, down from a previous forecast of 2.1%.

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Early evidence of the coronavirus’s impact on the U.S. labour market could come Thursday with the weekly release of jobless claims. This proxy for company layoffs remained historically low in late February amid escalating virus concerns on the economies.

Keep an eye on whether claims rise significantly in coming weeks or whether they hover at historic lows. Continually low claims would offer a sign employers are trying to hold on to workers in a tight labour market given the virus could soon pass. It doesn’t; however, mean companies will continue to hire at the robust pace seen in recent months.

Globalisation positioned China at the heart of complex supply chains, as companies worldwide came to depend on supplies from their operations there. As a consequence, factory shutdowns in virus-affected provinces have resulted in shocks across a wide range of industries.

The South Korean carmaker Hyundai was the first firm outside of China to announce that it would halt production in its domestic factories as a result of component shortages. Automobile producers in Europe and the United States have also warned they too will soon start running out of components.

The impact is similar in the technology sector, as China is the leading exporter of electronic components, with nearly 30% of the global export market. Disruptions in deliveries are particularly harmful to countries highly dependent on electronic supplies from China. For example, in 2019, Japan imported more than 45 billion dollars’ worth of Chinese electrical and electronic goods.

China is also the largest importer of raw materials, and commodity markets are consequently feeling the impact as well. The International Energy Agency (IEA) expects that global oil demand growth in 2020 will be 30% lower than originally expected. Instead of 1.2 million barrels per day as previously estimated, it will rise only by 825,000 barrels per day.

Similarly, the decline of the industrial activity in China has been a shock to the copper market, as the country represents half of the global demand. Copper is used in a wide range of industries, including automobiles, mobile phones and domestic appliances. Falling cross-sector sales have resulted in Chinese traders postponing or outright cancelling contracts with suppliers from Latin America and Africa, citing “force majeure” clauses – events beyond their control.

What's Next?

What happens next will largely depend on how the COVID-19 crisis evolves. In the best-case scenario, the virus will be contained shortly or start slowing down in the early spring. People will resume work in China, and industrial activity will pick up again. That should bring relief to the Chinese economy and the globe-spanning businesses that depend on it. The lagging demand will likely bounce back relatively quickly, particularly with the help of tailored government measures.

If the virus continues to spread across China, East Asia and other world regions, however, uncertainty and disruption will increase. Movement restrictions would continue, and supply chains that are currently temporarily disrupted would decompose entirely, and factory shutdowns would inevitably follow, not just in China but also in other markets. Some companies might consider revising their supply chains to find alternatives for China, but experience shows that that’s easier said than done.

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