Impact of Coronavirus on the Global Economy

The eruption of the Coronavirus in China has forged a wave of uncertainty and agitation across the world. 

 

Coronavirus, which is a family of viruses that can generate a range of illnesses in humans from the common cold to more acute forms of illnesses like SARS (Severe Acute Respiratory Syndrome) and MERS (Middle East Respiratory Syndrome) that could prove to be deadly. 

 

The name Coronavirus is conceived after the shape of the virus with it absorbing the form of a crown with protrusions around it. In humans, they're normally dispersed through the airborne droplets of fluid that are developed by the infected individuals. 

 

As of now the virus, scientifically designated as 2019 - nCoV, has spread across at least 68 countries and territories around the world and 1 international conveyance (the Diamond Princess cruise ship harbored in Yokohama, Japan).

 

With its death toll reaching 3,046 as of 2nd March, according to Worldometer, the virus’s outbreak has exceeded that of SARS, it’s worldwide death toll being 774. 

 

The new cases are surging to double-digit percentages over the past 2 days with no indication of declining. Overall over 89,073 people are confirmed to have been affected. 

 

 

Impact on the Economy

 

As China strives to survive the onset of the coronavirus, sizable sectors and services of the nation have been afflicted that include retailers, restaurants, tourism and many more. It’s not just the human cost but the economic cost is also mounting and not just in China.

 

 

With the crisis embarking around the time of the Lunar New Year the exposure of industries towards commercial losses has escalated. The need for companies to act and make decisions promptly has risen with the virus spreading to over 56 countries and putting the world economy on survival mode.  The virus has mangled global supply chains, struck air travel and convulsed markets as it appears all set to adversely impact the U.S. economy, the global economic engine. 

 

The long term outlook becomes vital for companies in evaluating their supply chains and in ensuring that access to raw materials, components and finished goods in the future will not be hindered by any such catastrophes. 

 

Wuhan is the industrial hub for the business operations of numerous Chinese and international companies that include automobile companies like Honda and Nissan and also various fast food chains that include McDonald’s, Pizza Hut and KFC. Thus as the virus spreads and expands from Wuhan’s epicentre the top priority becomes securing lives and reducing the circulation of the disease and the measures taken for the same are leaving a considerable impact upon the economy. 

 

1. One of the major areas impacted is the prices of industrial commodities where China is a prominent buyer. Oil prices have descended discernibly owing to the reduced demand for gasoline, diesel and jet fuel, thus leading Saudi Arabia stressing on deep cuts in oil production in order to stabilize prices to deal with the falling demand.  

 

• Crude oil, in particular, has hit its lowest level dropping by 15% in the past 2 weeks as per a source by The Guardian.

 

• As per data from EconoTimes U.S. crude oil fell 16% during the week, settling Friday at $44.76 a barrel. Brent crude, the international standard, dropped 14% for the week to its lowest levels since July 2017, closing Friday at $50.52 a barrel.

 

• Meanwhile, shares of Exxon Mobil tumbled to $49.82 on Thursday, reaching a 15-year low, before rebounding more than 3% on Friday. Chevron Corp. shares hit their lowest level in nearly four years on Friday.

 

2. Various technology firms are halting their operations in China. For instance, Apple, that has suppliers within Wuhan, has closed a number of its supplier factories from the end of January to mid- February. It’s chief Chinese supplier Foxconn is reported to have curtailed almost all it’s Chinese production operations. 

 

• Google has also announced its decision to close all it’s offices in mainland China, Hong Kong and Taiwan owing to the health threat. The company has also imposed restrictions on business travel to China and Hong Kong.

 

• Microsoft, The software giant has instructed it’s China-based employees to work from home and keep all non- essential business travel on hold till Feb 9. 

 

Hindrances in deliveries are particularly harmful for the countries which are hugely dependent on electronic supplies from China. For instance, in 2019 Japan imported more than 45 billion dollars’ worth of Chinese electrical and electronic goods.

 

3. Yet another impacted sector is that of the Automotive supply chain. Coronavirus has led to several automakers carmakers stretching the closure of their plants beyond the Chinese New Year until the second week of February. 

 

• BMW has decided upon extending the closure of 3 of its plants in Shenyang, China till Feb. 9. 

 

• Honda meanwhile has extended the closure of 3 of its plants till Feb 13. 

 

• Tesla Inc has warned of delays in its delivery in China. Its new factory in Shanghai has been sealed owing to the virus.  

 

• Hyundai Motor is halting it’s production in South Korea owing to a dearth of parts furnished from China.

 

4. With the virus showing no signs of a slowdown the Chinese Market is also one of the areas facing its brunt. Numerous global brands are bracing themselves for a considerable hit. 

 

• Nike, which generates 17% of its revenue from China, has shut down many of China's stores and the ones which are not closed are faced with minimised hours.

 

• Adidas has reported closing a certain number of its outlets. It states it is "too early to assess the magnitude" of the impact at this point. 

 

• However, Capri Holdings has informed investors that the virus could reduce revenue by almost $100 million for this quarter stating that the hit could be worse if "the severity of the situation worsens".

 

• Disney has also stated that the profits derived from its parks in China could fall by $280 million in the current quarter owing to the closures prompted by the coronavirus as well as the mass protests in HongKong. (Also read our blog on Disney Plus)

 

• Chinese cinemas which are the world’s second-biggest movie market after the US, have also been a victim of the Coronavirus epidemic. The country is also virtually shutting off it's cinemas and delaying the release of several top moves that were supposed to be premiered on the Chinese new year. 

 

• Another passion of Chinese travellers is luxury retail that represented 33% of the market share for personal luxury goods in 2018, a share that had been projected to rise to 46% by 2025. The industry is now facing its biggest challenge since 2008, as major luxury groups such as Kerring, LVMH and Tiffany become increasingly dependent on rising Chinese demand.

 

5. One sector that has been prominently impacted on a global scale is the Tourism sector. Various airlines going to and from China have also been suspended that include American, Delta and United Airlines.

 

• The virus has impacted nearby nations like Japan where the Chinese visitors account for 40% of the total tourist spend and cruise ships. 10 passengers onboard a cruise ship was anchored offshore after being tested positive. 

 

• Thailand’s tourism sector also faces the threat of a loss with its economy struggling and Chinese tourism making up for about 4% of its GDP as per Capital Economics. The Thai currency has lost around 4.1% this year against the U.S dollar overturning it’s 7.9% gains against it in 2019.

 

• Various favoured tourist destinations like Bali have also faced a massive impact with the Indonesian government temporarily stopping flights to and from mainland China. The government is also indicating it may ban live exports from China. 

 

• Many hotel companies like Accor, Marriott, Hyatt are easing the cancellation fees in the region for their inbound travellers and specifically for Chinese citizens existing under a government-imposed group travel ban owing to the virus. 

 

6. Food and beverage chains like McDonalds and Starbucks have also shut down their stores and curtailed their services in China. Starbucks, which operates over 4000 stores in mainland China recently disclosed that more than half its stores in the country have been temporarily sealed owing to the outbreak. The firm said the financial impact “cannot be reasonably estimated at this time” 

 

"China is a critical market for us and we're very concerned about the situation over there," McDonald's CEO Chris Kempczinski has stated over the brand shutting down its stores in Hubei province. 

 

China’s isolation amidst the eruption of coronavirus has induced a shock rippling throughout the globe and bears the threat of impacting the economy, not only on an international but also on a global scale. 

 

With the virus bringing disruption in the worldwide trade as well as supply chains thus leading to declining asset prices, the need for limiting risks and effectively maintaining the flow of goods and services has highly escalated. 

 

This is crucial for business leaders to comprehend their vulnerabilities in light of the circumstances and to implement long term solutions in order to reduce risks, both for the people as well as the production in the future. For more blogs on Analytics, Do read Analytics Steps!