Fri. Apr 3rd, 2020

Foreign Policy Institute

Analysis of world affairs

IMPACT OF CORONA VIRUS ON WORLD ECONOMY

corona1

No doubt that there were lot worse epidemics in the history of our old world but thanks to the developing information technologies the impact of the corona virus may be the biggest on global scale. Anyone who has internet access can read all the news about it and may get really anxious as the health authorities and politicians make some declarations almost everyday about it. There will be great economic impact on the world economy as China is one of the biggest economies in the world and again one of the biggest exporters of the world. With a population of around 1.4 billion China’s consumption of goods is signifcant alone and together with the psychology of foreign buyers the production of goods shall decrease and it will affect the world economy.

China is a very popular touristic destination in recent years and there is no doubt that the number of tourists who are willing to visit China this year shall drop tremendously. Most probably importers of Chinese goods shall stop their purchases until China becomes virus safe and this will affect the prices in China and the world.

Here are some views from the respectable sources of the world press regarding the situation;

 

How will the coronavirus affect the world economy?

by DW.com
Less consumption, idle factories, broken global supply chains. It’s not just the Chinese economy that is suffering from the spread of the coronavirus — but the moment of truth is yet to come.
The coronavirus epidemic is spreading further in China and Chinese experts believe that it could peak in 10 to 14 days. Around 45 million people in the Chinese province of Wuhan are cut off from the outside world. In order to curb the spread of the virus, Beijing has extended the Chinese New Year holiday, and pushed back the opening of the stock markets. When it finally opened on Monday, stock prices crashed. They, however, stabilized again on Tuesday.

As a precaution, Beijing had given the financial system an unusually high injection of 1.2 trillion yuan (€156 billion, $171 billion) to keep the domestic money market and banking system functioning. In addition, import duties on goods that are important in the fight against the disease were eased.

But it’s not only the stock markets that have been hit. Chinese consumption has also plummeted as a result of the outbreak. Large New Year’s events were canceled; tourist attractions and cinemas were closed. The doors remain closed at around 2,000 Starbucks, hundreds of McDonald’s restaurants, 130 Uniqlo shops and at all 30 Ikea stores.

The travel industry has also been badly affected. Several countries issued travel warnings about China; some airlines even suspended flights to China. Lufthansa and its subsidiaries Swiss and Austrian Airlines canceled their connections to and from Beijing until February 29. The Chinese authorities urged its own population to postpone travel abroad and prohibited domestic travel groups.

Most factories and offices will remain closed this week. Several carmakers, including Volkswagen, BMW, Volvo, Toyota and Tesla, extended their annual New Year production breaks. Additionally, China’s largest oil refinery cut production by around 600,000 barrels a day due to shrinking fuel demand.

Learning from SARS

When SARS hit China 17 years ago, domestic trade suffered significantly and stock markets fell. However, the global economy is now much more interconnected and the Chinese economy is much more important. At the time China’s share of the world economy was only around 5%, today it is more than 16%.

Now the world’s second-largest economy is an important export market for German products, an important production location for German industrial companies and the starting point for many global supply chains.

The ifo Institute’s economic expert Timo Wollmershäuser believes that “the economic consequences will be greater than the SARS epidemic.” That crisis, which lasted 6 months, cost China about 1% growth in gross domestic product (GDP), a number so small that it was hardly reflected in the German figures. “Since then, the country’s economic importance has grown, the infection rate is greater and the Chinese government has reacted harder,” said Wollmershäuser.

Too early for a true analysis

Many experts believe that it is too early to talk about the extent of economic consequences. Jens Hildebrandt, the director of the German Chamber of Commerce in Beijing, told DW that the country is at a practical standstill anyhow because of the Chinese New Year and spring festivities. “All factories close for three to four weeks,” he added. Thus, even under normal circumstances, the entire economy — except for the important tourism industry — would be offline.
CORONAVIRUS: TIMELINE OF THE DEADLY VIRUS IN CHINA AND WORLDWIDE

On December 31, 2019, China notifies the World Health Organization of a string of respiratory infections in the city of Wuhan, home to some 11 million people. The root virus is unknown and disease experts around the world begin working to identify it. The strain is traced to a seafood market in the city, which is quickly shut down. Some 40 people are initially reported to be infected.
How the coronavirus outbreak is impacting employment and ongoing production will only become apparent from next or the week after next, according to Hildebrandt, since the Chinese government has extended the holidays until February 2 and in some cities until February 9.

The reason is that a large part of the factory workers come from the region around Wuhan, which is almost completely quarantined, says Hildebrandt. Only in the coming week will it become clear how many workers will return to the main production locations in the Shanghai and Beijing areas and in southern China, and to what extent production and thus the international supply chains will be affected by the virus.

Hitting the supply chain

“We see no signs as of now that supply chains will be completely disrupted, even if there are delays,” said Gerhard Wolf, head of foreign trade at the Association for Wholesale, Foreign Trade and Services (BGA). His credo: No need to panic.

So far, there is no trace of panic among German companies, says Hildebrandt from the German Chamber of Commerce in Beijing. “At the moment they are acting rather calmly, though plans are being drawn up for how to deal with the situation.”

The German Institute for Economic Research (DIW) is also taking a careful approach. “It is still far too early to be able to carry out a serious analysis of the economic effects of the coronavirus,” said DIW President Marcel Fratzscher. “If the spread of the coronavirus in China and worldwide can be successfully contained, then the economic costs should be limited and be limited to a short-term loss of production in China.”

Stopping the supply chain

However, should the production stops in China last longer, the international supply chains would be at risk, warns Klaus-Jürgen Gern from the Kiel Institute for the World Economy.

“China is significant as a supplier to the rest of the world,” said Gern. A long standstill could interrupt supply chains in the chemical, automotive, textile and electronics industries, warn Allianz economists. International companies would no longer get the parts they need and would have to find other suppliers or shut down production.

One that has already been hit is the South Korean manufacturer Hyundai Motor. The company announced on Tuesday it would suspend all production in South Korea later this week. The reason for the suspension is that the cable harnesses required for production, which Hyundai usually gets from China, are just not coming.

 

What Will the Coronavirus Do to the US & Chinese Economy?
by Wolf Richter • Feb 6, 2020 •
Is this the black-swan event people have been predicting for years?

The numbers are getting bigger every day. As of the end of Saturday in China, there have been over 14,000 confirmed cases of the novel coronavirus, which originated in Wuhan, a city with 11 million people, in Hubei province. 304 people have died in China, according to official numbers.

And there are reports coming out that confirm suspicions that official numbers in China may have to be taken with a grain of salt. According to a report by the New York Times today, Chinese authorities silenced doctors and others who were seeing the first symptoms starting in early December. Authorities obfuscated even the basics: for example, they told the public that they closed the food market, where the virus had first infected humans, for renovations.

This crackdown on doctors and others kept people in the dark, prevented them from taking protective measures, delayed an effective public health response, and allowed the virus to spread.

What the Chinese government is still not telling the public, or what it is telling the public that is wrong, just adds to the list of known unknowns that the economy and markets have to deal with.
And now there are fears what unknown unknowns may still be lurking out there that might surprise everyone.

Maybe all this will blow over in a few weeks, and China’s economy goes back to normal, with just another flu-like disease on its hands, running in parallel with the flu.

Or maybe it will drag out and get worse and more complicated and more insidious, as baffled authorities lumber from what with hindsight may look like one wrong decision after another, and then the repercussions are going to spread.

One thing we already know: 14 provinces and cities that account for nearly 70% of China’s GDP have now shut businesses and factories until at least February 9.

In the US, 8 cases of coronavirus have been confirmed. In Japan 17. None of these patients have died. But in the Philippines, a Chinese man, traveling from Wuhan, has died of the coronavirus, the first death outside China.

On Friday, the US Department of Health and Human Services declared a public health emergency and said that foreign citizens who’ve traveled anywhere in China within the past 14 days will be denied entry to the US. And it said that US citizens who had traveled in Hubei province will be quarantined for up to 14 days.

We don’t know yet what the coronavirus will end up doing, though we know what the flu virus has already done so far this year in the US alone.

The CDC estimates that this flu season in the US alone, that medical conditions caused by the flu have killed at least 10,000 people. The top end of the CDC’s weekly estimate now sits at 25,000 deaths, with somewhere around 20 million Americans infected with the flu, and we’re only about half-way through the flu season.

Globally, the flu has killed between 290,000 and 650,000 people each flu season in recent times.

But there are differences between the flu and the novel coronavirus.

This coronavirus is new, and there is no vaccine, while the flu is a known issue that kills tens of thousands of people in the US every year, and hundreds of thousands of people globally every year, though there is a vaccine which is only moderately effective, and tens of millions of people in the US alone get sick every year, and miss work and stop shopping and cancel trips.

But because it happens every year, it’s part of the seasonal economic ups and downs, and it’s baked into the cake of life, so to speak, and it’s baked into the economy and into financial markets.

But this coronavirus is new, and it’s in addition to the ravages of the flu. The flu will kill tens of thousands of people in China this flu season. The coronavirus is in addition to that. And preliminary data indicates that the coronavirus death rate is quite a bit higher than the death rate of the flu, though it’s not nearly as high as the death rate of SARS was.

And there is something else that is different – the reaction to the virus by authorities and large and small economic players, spreading across China, from draconian quarantines and lockdowns of entire huge cities and travel restrictions, to closed universities, cafe chains, stores, and manufacturing plants.

Entire transportation systems have gotten shut down. People stopped going places – and this was the Chinese New Year when nearly all of China goes somewhere. And just plain daily life has been disrupted in the affected areas, as the fear of infection is keeping many people at home. And economic activity has dropped.

Economic activity doesn’t need to drop a lot in an economy as vast as China’s before it has an impact globally.

On Monday, February 3, the financial markets in China will reopen, after having been closed since the end of trading on January 23rd for the New Year break. Over the last five trading days before the break, the Shanghai Composite index dropped over 3%.

Markets were supposed to have reopened on Friday, January 31, but authorities extended the national holiday to get a better handle on the markets before they re-open.

Chinese government entities, state-owned financial firms, and regulators, along with big financial market participants will try to keep the bottom from falling out of the markets, as they have done in the past.

Authorities have urged market participants to not panic and to remain calm. China’s securities regulator urged investors to look at the coronavirus “rationally and objectively.” And it urged investors to “adhere to the concept of long-term investment and value investment.”

And the People’s Bank of China said it would drown the market in liquidity over the next few days to prop up the markets.

Nevertheless, I expect some fireworks in Chinese markets on Monday, as markets are trying to price in the known unknowns, and as they’re trying to figure out what the unknown unknowns might be.

Authorities may also counter this with some monetary and fiscal stimulus in order to prevent further slowing of the Chinese economy. The defaults in corporate debt are already spooking said authorities; and at smaller and regional banks, loans have soured to such an extent that bailouts are now happening in a routine manner. The coronavirus comes on top of it.

One thing that is becoming increasingly clear: the reaction to the coronavirus will be a blow to the Chinese economy, at least for the period that these measures are in place, and some of it will percolate around the world.

Transportation and tourism outside China are already being impacted. A number of airlines have canceled flights in and out of China. Foreign citizens who’re coming from China, in particular Chinese citizens, are no longer allowed into a number of countries.

In many places, tourists from China have become the largest group. Suddenly, they’re not showing up. They’ve made reservations, but they’re not coming. This impacts the tourist industries in cities like Paris, San Francisco, and Tokyo.

China has become the largest market in the world for passenger vehicles. Peak sales occurred in 2017, with nearly 25 million cars and light trucks delivered. But in 2018 and 2019, sales fell by a combined 13% from 2017. This year already started out on a bleak note, and then the coronavirus hit.

It is hitting in two ways:

One, auto sales: people have cut back on going out and doing stuff, and buying things, and in some of the most affected areas, auto sales have come to a near-standstill.

And two: production. Auto manufacturing is one of China’s official key industries. All major global automakers have plants in China. Most of the vehicles sold in China are made in China.

Some of the biggest automakers in China, including Volkswagen and GM, have announced that they closed at least some of their plants through February 9. Tesla’s Gigafactory in Shanghai also suspended production before it ever got going properly. And companies across the board have warned that they anticipate disruptions.

The components industry in China is huge. And it faces similar shutdowns that will then translate into supply chain disruptions for automakers.

Research firm IHS Markit said that if the coronavirus spreads rapidly across China, it could entail a further wave of plant closings that might drag into mid-March, and this could slash auto production by as much as 32%.

In terms of global automakers, if the disruption to their global supply chains and the plunge in sales in China lasts much beyond February 9, they’re going to show up in their first-quarter earnings calls, or before. And this includes GM, which is a huge player in China.

The reduction in every-day activity in China and the shutdown of part of the transportation system, including the cancellation of countless flights, is going to impact global demand for crude oil. And this already hit the beaten-up US shale oil industry.

The crude-oil benchmark grade, WTI, was trading at over $60 a barrel at the beginning of the year. It has since then slumped by 15% to below $52 a barrel, the lowest level since early August. This comes at the worst possible time for US shale oil producers, which are already reeling from overproduction, losses, and bankruptcies.

There are other industries that will be impacted by the reaction of authorities and economic players to the coronavirus.

But for once, the big trade deficit that the US has with China ensures that even if demand takes a nose-dive in China, it’s going to hit the US economy to a much smaller extent.

Supply-chain disruptions may become a headache for manufacturers in the US, particularly in industries with sophisticated machined products, such as the auto industry, that cannot be re-routed quickly.

And a general slowdown in the global economy is going to impact the US. Tourism and the entire travel industry, and airlines are going to take a hit, at least temporarily.

But here is the thing: health scares have a tendency to blow over fairly quickly, in terms of their economic impact. In the past, they disrupted things for a few months, and then everyone got used to it and adjusted to it, and companies found partial solutions and workarounds, and life sort of went back to normal.

The flu is a big killer, but has been baked into the economic pie. Companies and people live with it. Other diseases came and went. SARS has essentially disappeared.

Human nature is resilient and resourceful, and economies will get through this.

So I expect a significant impact in China in the first quarter, and I expect a small impact in the US economy. It’s going to put more pain on the US shale oil industry, but it was already in trouble before this started.

And if disruptions drag out, I expect troublesome supply chain issues that will eventually get worked out. Broadly speaking, inventories are high in the US. And there is a buffer for many products.

But the biggest factor is just how concentrated the US economy is on services and on consumer spending – not manufacturing.

So beyond some limited sectors, I don’t expect a huge impact in the overall US economy. I don’t think this is the black-swan event that people have been predicting for years. I expect that the reaction to the coronavirus will eventually settle down. This may happen over the next few weeks, or it may take longer, but it will settle down.

The outbreak of a health threat – whether it’s Ebola, SARS, or the coronavirus – always causes an uproar in the US media, and rightly so because people should know about it. But the economic impact of these health threats in the US – and that’s the key here, in the US – has been only minor in recent times.

The big thing that can kill the US economy is a disease in the financial system, as we have seen. The US economy runs on credit, and when credit gets the flu, as we have seen during the Financial Crisis, when banks and other financial firms threaten to collapse, that’s when all bets for the US economy are off.

What Will the Coronavirus Do to the US & Chinese Economy?

 

Coronavirus: The economic cost is rising in China and beyond
By Andrew Walker
BBC World Service economics correspondent
The furniture store Ikea closed all its 33 shops in China in response to the outbreak
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.

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 would not have much slack to take this kind of impact, coming, as it did, on top of 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.

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.

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.

It is early days to attempt to quantify the likely economic effects.

Much will depend on how well the Chinese authorities are able to contain the virus.

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.

https://www.bbc.com/news/business-51386575

 

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