The coronavirus COVID-19 is spreading around the world. To date more than 82,000 people are infected and more than 2700 people have died. On 27 February, nine countries reported their first cases.
As the virus spreads and governments start planning for a pandemic, its economic damage also grows. When the world's second-largest economy and leading trading nation is hobbled, the impact of lost revenue and disrupted supply chains are widespread and significant.
A Reuters poll of economists said China's economic growth was expected to slow to 4.5 per cent in 1Q20, the slowest since the financial crisis.
Earlier optimism that if the virus was contained China would rebound relatively quickly is giving way to increasingly nervous markets and entire sectors, e.g. education and tourism, recording massive profit downgrades.
World Economic Forum head of Shaping the Future of Advanced Manufacturing and Production Francisco Betti said that global value chains have been designed to optimise cost competitiveness, but COVID-19 underlines the need to also focus on risk competitiveness.
Betti said it was clear how the outbreak was disrupting manufacturing and global value chains, with many CEOs “scrambling to respond to urgent questions about how to protect their employees, ensure supply security, mitigate the financial impact, address reputational risks, and navigate market uncertainty, which is driving down demand”.
Comparisons to past crises like the 2003 SARS outbreak were not beneficial because China is now a much more developed and integrated global economy. In 2003 it accounted for nine per cent, whereas today it accounts for 28 per cent of global manufacturing output. On top of that, value chains are now global and much more complex, he said.
The International Monetary Fund puts China’s share of global output at 19.7 per cent this year, more than double its 8.5 per cent share in 2003, during the SARS outbreak. China has also accounted for 37 per cent of the cumulative growth in world GDP since 2008 and no other economy stepping up to fill the void. The risk of outright global recession in the first half of 2020 seems like a distinct possibility, it said.
Betti said: “Businesses should increase the visibility of value chains, shorten supply chains to be nearer to customers, leverage technologies and evaluate different scenarios.”
The availability of white- and blue-collar labour is severely limited, and strict quarantines in key manufacturing hubs continue to take a toll. Predictions by Jefferies Financial Group said only 60-80 per cent of China’s 300 million migrant workers are expected back by 2Q20.
Daily activity trackers compiled by Morgan Stanley’s China show that at 20 February, coal consumption (60 per cent of China’s total energy consumption) was 38 per cent lower the same time last year. Nationwide transportation comparisons were even weaker, making it extremely difficult for China’s nearly 300 million migrant workers to return to factories after the annual Lunar New Year holiday.
“Leaders urgently need to deploy short-term strategies to become more resilient and make longer-term considerations that will reconfigure supply chains to protect against risks,” Betti said.
While China is the largest global exporter, it is also vital to global value chains (GVCs). Yale's School of Management senior lecturer and Jackson Institute of Global Affairs senior fellow Stephen Roach said recent research showed that GVCs accounted for nearly 75 per cent of growth in world trade and that China was the most important source of this expansion. China’s shock is a major bottleneck to global supply, he said.
Change in eating habits
With bans on large gatherings, one of China’s largest food delivery companies has seen major changes in consumer eating habits. Meituan has more than 700,000 active daily couriers delivering food and groceries.
When the outbreak first occurred, Meituan piloted a contactless delivery service in Wuhan and a number of other cities. From 26 January to 8 February, 80 per cent of all its orders requested the contactless delivery.
It also saw major changes in the size of orders. Traditionally, food delivery is considered to be for people that are alone. Meituan said it has seen a 31 per cent increase in orders that serve more than one person and the amount of orders serving five people or more grew more than 70 per cent.
While the world financial, trade and supply chain sectors wobble, there is one unexpected bright spot. China’s lowered electricity demand and industrial output has reduced its typical carbon emissions by 100 million tonnes.
INDUSTRY BRIEFING #1, 12 February 2020.
INDUSTRY BRIEFING #2, 19 February 2020.