The impact of the coronavirus on global economic growth

The impact of the coronavirus on global economic growth

The virus continues to cause human suffering in China and elsewhere, but it also affects different industries. This causes uncertainty about the global economy as the virus reduces demand and disrupts supply.

SARS vs. Covid-19

In the last 20 years, China has been infected by the coronavirus family twice. In 2002, the SARS outbreak claimed 800 lives and affected 8,000 others. Although the economic impact of SARS is difficult to estimate, an analysis shows that global GDP experienced a slowdown in growth of 1% and at least 40 billion US Dollars in 2003.

China’s economy has grown tremendously since the early 2000s. CNBC

Since 2003, many things have changed. This includes the size of China’s economy and its place in the world. China was the sixth-largest economy in the world and represented a little over 4% GDP of the global total at the time of SARS. It contributes more than 16 % of the worldwide GDP today and is the world’s second-largest economy after the United States.

In 2019, the country’s contribution to global growth exceeded 39%.

Workers in a Yangzhou factory produce facemasks, among other medical supplies. To meet the rising demand, factories in China, Thailand, and even North Korea increased production. AFP

Manufacturing under distress

As a result of globalization, China has become the center of complex supply chains. Companies around the world rely on China for their supplies. The shutdown of factories in provinces affected by the virus has caused shocks to a variety of industries.

Hyundai, a South Korean automaker, was the first company outside China to announce it would stop production in its domestic plants due to component shortages. The European and United States automobile producers have warned that they will also soon run out of parts.

Many global markets highly demand electronic components from China. Financial Times

China exports electronic components at a rate of nearly 30 percent of the global market. Delivery disruptions are especially harmful to countries that depend heavily on Chinese electronic supplies. In 2019, Japan imported more than 45 Billion dollars worth of Chinese electronic and electrical goods.

Commodity markets are volatile.

China is the world’s largest raw material importer, which has a direct impact on commodity markets. The International Energy Agency expects global oil demand to grow 30% less than initially expected in 2020. Instead of 1.2 million barrels a day, as was previously estimated, the growth will only be 825,000 barrels a day.

The decline in industrial activity has also been a shock for the copper market, as China represents half the global demand. Copper is widely used across a variety of industries, including mobile phones, automobiles, and household appliances. Chinese traders have canceled contracts with Latin American and African suppliers due to falling cross-sectoral sales. They cited “force majeure clauses” – circumstances beyond their control.

Plummeting demand, rising concerns

The travel and Tourism industry is already feeling the impact on demand. As demand for air travel drops for the first 11 years, the airline industry is expected to suffer a revenue loss of up to 29 billion US dollars.

Chinese tourists are the biggest group of international travelers. In 2019, Thailand welcomed around 10 million Chinese visitors, which represents 30% of the total number. Thai officials estimate about 1,3 million visits were cancelled in February and March due to the outbreak.

The tourism industry in Asia-Pacific region is heavily dependent on Chinese tourists. CNN

Currently, the impact of on European tourism is limited . Paris hosts about 800,000 Chinese visitors each year, but this only represents 3% of the total number of tourists. There are concerns about the fact that Chinese tourists often travel in large groups and that certain hotels are currently vacant. Other European countries, such as Germany and Austria, have reported similar trends.

Luxury retail is a passion for Chinese travelers. Since the early 2000s, Chinese shoppers have acquired a taste for luxury products. In 2018, they accounted for a 33% share of the market for personal luxury items. This share is or was projected to increase to 46% by the year 2025. As luxury brands like Kerring, LVMH, and Tiffany become more dependent on the rising Chinese demand, this industry faces its greatest challenge since 2008.

What lies ahead?

The next steps will be determined by the way in which the Covid-19 situation develops. In the best case scenario, the virus can be contained or will start to slow down by early spring. In China, people will return to work, and industrial activity will increase. This should provide relief for the Chinese economy as well as the global businesses that rely on it. Demand will rebound relatively quickly with tailored government measures.

Uncertainty and disruptions will only increase if the virus spreads across China, East Asia, and other regions of the world. The virus would spread further, and the supply chains would collapse. Factory shutdowns in China and other markets would follow. Companies may consider re-evaluating their supply chains in order to find alternatives for China. However, experience has shown that this is easier said than accomplished.

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