The Economic Impact of Coronavirus Outbreak Deepens.

One of the most important economic forces in the world has all continents upside down for a virus that has already spread in 37 countries.

 

By: Diana Bello Aristizábal

 

Para leer en Español

“If China catches a virus, the world catches pneumonia,” says metaphorically John Quelch, Dean of Miami Herbert Business School at the University of Miami, referring to the domino effect of the coronavirus that had its first outbreak in the Chinese city of Wuhan, Hubei province, at the end of last year. The virus has set off one of the biggest health crises in recent years.

The domino effect is shown not only in the death toll that in China alone is of more than 2,000 but in the global economy. While this country struggles to contain the outbreak and simultaneously develops fiscal and monetary policies, different economic sectors around the world already feel its effects.

The situation has reached to a point where companies such as Apple, BMW or Hyundai have made concerning announcements during the past month that could have an impact on consumers in the future, since China is one of the largest suppliers of machines and technological equipment, textiles, metals and chemical products, among others.

South Korea’s Hyundai, for example, recently announced the suspension of its car production due to problems with parts suppliers in China.

“The automotive industry could be adversely affected. BMW in Germany has already announced that it is running out of parts in some production lines and although the company can find an alternative supplier, that usually takes time. Therefore, it is safe to say that there could be a shortage of parts and equipment,” says Quelch.

Apple, on the other hand, revealed that this quarter will not be able to meet its earnings projections. In this regard, Quelch explains that the situation in the electronics market may represent a product supply shortage that would result in more robust prices at retail.

“If Apple increases prices at retail, then other suppliers like Samsung may be able to steal some market share. The result would be that companies would accelerate the shift of their supply chain to other economies in Asia outside of China, which would probably delay the speed of arrival of certain products in the market,” states Quelch.

However, companies would be working over a period of 90 días with what is known as ‘buff inventory’. In other words, in the supply chain, there will be 90 days worth of inventory. Once passing this mark, there could be a significant supply shortage in retail stores in the U.S., sometime around April.

But these are not the only industries that have been affected by the outbreak. Several international airlines have suspended their flights, and digital hotel reservation platforms and hotel chains have become flexible in their cancellation policies and announced the closure of their operations.

This is due to the fact that the tourism industry has felt heavily the consequences of coronavirus. In the United States, for example, 3 million Chinese tourists are received every year bringing 35 billion dollars to the national economy.

“The tourism industry has been severely impacted and it doesn’t seem like it will be recovering in the second quarter of the year, because by then people will be more focused in making money than in traveling,” explains Sheng Guo, a specialist in macroeconomics and economics instructor at Florida International University.

The projections for this industry are not encouraging. According to a recent report, global losses are expected to reach 80 billion dollars.

In this scenario, airlines are taking the worst part. According to a UN report, international airlines worldwide will lose 4,000 to 5 billion dollars in gross operating revenues due to the outbreak.

Air France, for example, recently announced that the suspension of some of its flights will subtract more than 150 million euros from its results until April, while IAG, the group that manages Iberia and British Airways, had a decrease of 2,1 percent in Ibex, the main reference stock index of the Spanish stock market.

Despite this, Sheng Guo believes that the impact on national tourism will be minimum, considering that although there’s a large influx of Chinese travelers to the United States, the country depends much more on domestic flights travelers to generate profits.

In Florida, for example, of the 14 million international travelers that the state received in 2018, less than 300,000 arrived from China, which represents roughly 2 percent of all international visitors.

However, this is not the reality for everyone. In Los Angeles, for example, a loss of up to 325 thousand Chinese tourists is predicted due to the outbreak, resulting in a 921 million dollars drop in direct expenses.

But the list of shaken industries by coronavirus is even longer. As far as toys, American consumers can start preparing for a shortage of products, since 84 percent of all toys sold in the United States come from China.

Some companies have begun to feel this reality head-on, as is the case with MGM Entertainment, which markets L.O.L Surprise dolls. The company’s executive president announced its production fell by 60 percent compared to this same period last year.

In addition, the concern for the coronavirus has also extended to the sports world. Several events worldwide have been canceled or suspended such as the Chinese Formula 1 Grand Prix, scheduled for April 19, that was suspended.

The FIA ??and F1 announced that they will continue to monitor the situation and explore the possibility of changing dates if the public health situation improves.

The Asian water polo championships were also canceled, as well as the Rugby Sevens Series 2020 of Hong Kong and Singapore because in these two countries health problems for coronavirus haven’t ceased. Regarding the Olympic swimming events in China, it hasn’t been confirmed yet if they will continue or not.

On the other hand, soccer has also suffered. The start of the China and Japan leagues was postponed, while in Italy, the A Serie suspended a few matches and decided that the game between Juventus and Inter would be played behind closed doors.

For the same reason, the future of the UEFA European Championship is unclear, although it would be suspended only if the situation worsens. This is also the case with Tokyo 2020 Olympic Games pending upon a final decision in 3 months.

And coronavirus has also hit the fashion world. Shanghai Fashion Week, one of the most ambitious of the region, as well as the China International Fashion Fair, which would take place from March 26 to April 2, was postponed.

About the oil industry, since China is the biggest oil-importing country, mostly due to its demand for gasoline and jet fuel, this year its prices have plunged by 17 percent. This has meant that many exporting countries are considering making production cuts in an effort to reverse the price drop.

In this regard, Sheng Guo explains that although China was a major importer of oil last year, the demand in China has been slowing down even before the outbreak appeared due to the slow growth of its economy.

“In 2019, China accounted for more than 3/4 of global oil demand growth. Before the coronavirus, experts predicted that approximately 1/3 of the oil demand growth was coming from China, so the contribution of this country has already been declining,” says the expert.

And so have the stock markets around the world. Recently, the Dow Jones, the main index of the New York stock exchange, had its worst day in more than two years, losing 3.56% to 27,960.80 points, ending downwards with fears of investors of a long-term slowdown of the worldwide economy.

Meanwhile, Wall Street closed down sharply in recent days, while the Nasdaq lost 1.6%. As for the international markets, in the London stock exchange, the FTSE lost 3.34%, the Ibex 35 in Madrid fell 4.07% and the FTSE Mib in Milan collapsed by 5.3%.

By seeing this picture, many wonder how deep the damage to the economy is and if there will be a recovery considering that China represents 16 percent of the global economy.

According to John Quelch, it is expected to see at least a 3.0 point reduction in China’s GDP during the first quarter that could extend to the second. “If China’s GDP growth is 3 percentage points negative, that effectively means at least one percent negative in the world’s GDP,” he explains.

However, experts believe that as long as the outbreak is contained, the economic damage, for the time being, is temporary. If that was the case, workers could return to their factories and resume production.

For Sheng Guo, during the first quarter of the year, the global economy will be affected mainly by the impact of the outbreak and there will be a gradual recovery during the second.

John Quelch, on the other hand, considers that it is necessary to wait at least three months to have a clearer view of the situation since there is a timeline of six months between the identification of the virus and the commercial availability of a vaccine.