Coronavirus may knock 1.3 per cent off global GDP growth

Stock Markets globally lost about $5 trillion of wealth during last week, as measured by the MSCI all-country index, roiled by coronavirus fears. The full impact of the coronavirus outbreak on the global economy is still not assessable. “Right now the market is saying that this is unbounded. We don’t know what the limits are and we don’t know where it’s going to peak,” said Graham Tanaka, the chief investment officer at New York-based Tanaka Capital.

Hit on China’s economy

Some unofficial reports estimate that factories outside Hubei province, where the virus started, could be working at no more than 50 to 75 per cent of their capacity, with millions of workers remaining trapped in their home province, unable to travel back to their place of work due to continued travel restrictions. The Chinese government reported that larger factories reached 85.6 per cent of their capacity by the middle of last week. China’s manufacturing purchase managers’ index (PMI) dropped to 35.7 in February from 50.0 in January, the lowest since November 2008. China’s manufacturing PMI dropped to 38.8 in November 2008 at the start of the global financial crisis. The non-manufacturing PMI — a gauge of sentiment in the services and construction sectors — also dropped to 29.6 from 54.1 in January, the lowest since November 2011. There was also a plunge in demand for consumer industries
involving gatherings of people such as transportation, hotels, catering and tourism.

Within the manufacturing PMI, China’s export order sub-index dropped to 28.7 from 48.7 in January, while imports fell to 31.9 from 49.0. Manufacturing companies in China are facing export order cancellations and delayed delivery of imports. With the epidemic having come under initial containment in China, manufacturing PMI is expected to improve slightly in March. BNP Paribas downgraded China’s first quarter (Jan-March quarter) GDP growth from 5.5% annualized to -0.5%. China’s first quarter GDP loss could amount to about $ 250 billion in value. China’s annual GDP growth could take a hit of 2% this year. Mainland China is now the world’s second-largest economy, accounting for 17% of world GDP.

Hit on supply chains and global trade

China, Japan and South Korea are at risk of a wave of disruptions to their supply chains due to the ongoing impact of the coronavirus epidemic. The three Asian countries contribute around 24 per cent of the entire world economy with a combined yearly trading volume of over $720 billion, forming one of the most integrated international economic blocs in the world. China has been attempting to boost trade and investment with Japan and South Korea, as risks of decoupling from the United States increase on account of trade wars. The supply chains linked to the production of cars, machinery, optical electronic equipment and chemical products could suffer short-term shocks if the outbreak expanded further into Japan and South Korea.

Impact on India

With regards to the Indian perspective, the outbreak of the virus in China has hit manufacturing and exports sectors, particularly medicines, electronics, textiles and chemicals. China is India’s biggest source of intermediate goods, a sector worth $30 billion a year. Up to 70 per cent of active pharmaceutical ingredients and close to 90 per cent of certain mobile phone parts come from China.

The cascading economic impact of the coronavirus outbreak worldwide is evident from Apple’s surprise cut to its sales forecast due to supply chain disruptions spooking global markets. The virus has hit the global automotive industry particularly hard, with knock-on effect in Japan, South Korea, Germany, UK — and even the United States. JCB, the excavator manufacturer, has cut production and working hours at its UK factories. Fiat Chrysler warned this month that one of its European plants was just weeks away from having to shut down. Many factories have so far been able to run down inventories of components rather than cease production altogether. If the lock-down in China continues, these inventories will eventually run dry.

European companies fear that the supply of critical parts from Chinese producers will be cut off in the coming weeks by coronavirus-related disruptions, despite production in China slowly restarting this week. The disruption may accelerate attempts by companies to diversify away from China. Yet there is no country that can easily replace it. Supply chains are not indestructible. If the virus prevails for a prolonged period and the costs or risks are high enough and far exceed the profits generated by supply chains, the entire structure can be dismantled. For the first time since World War II, the global economy faces the possibility of a true decoupling.

Impact on global GDP

Coronavirus is a ‘Black Swan’ event for the Global Economy. The term “Black Swan” is used to emphasise unpredictable, rare events that have the potential to deeply affect the financial world and global economic systems.

After the spread of coronavirus to several countries outside China, analysts now see the coronavirus outbreak as a material disruption for the global economy. The coronavirus pandemic lasting six months could knock off $1.10 trillion from the expected growth of global GDP, according to a report issued by UK research firm Oxford Economics. Consumers will spend less, people will be unable to work, travel and tourism will drop sharply and investment and trade will fall, said the firm, which based its analysis on past outbreaks including SARS and Swine Flu. The spread of the virus to regions outside Asia would knock 1.3% off global GDP growth this year which is equivalent to $1.10 trillion in loss.

Airlines expect demand to drop 4.7 per cent this year, which would lead to the first overall decline in global air travel since 2008. Around $29 billion is expected to be wiped off from airlines’ global revenues this year, said its trade body the International Air Transport Association. Luxury fashion brands, which depend heavily on Chinese buyers in particular, are taking a hit. A report from the investment management firm Bernstein found that the coronavirus could end up costing the luxury market as much as $43 billion in sales in 2020. Global oil demand has been hit hard by the novel coronavirus. “Global oil demand is now expected to fall by 4,35,000 barrels year-on-year in the first quarter of 2020, the first quarterly contraction in more than 10 years” International Energy Agency (IEA) said in its latest monthly report. Global auto sales could dip by as much as 2.5 per cent this year due to Coronavirus, according to a recently released report by Moody’s.

Supply-chain analytics provider TrendForce has issued a report assessing the likely impact of the outbreak of COVID-19 on tech manufacturing. Smartphones and Notebooks production is projected to decline by 12 per cent year-on-year in this quarter, which would make it the lowest quarter in five years. Video game console manufacturing has been heavily hit, production is projected to decline by 10 per cent year-on-year. Several optical fibre suppliers are based in Wuhan, where the coronavirus outbreak originated, and together account for 25% of global production. Global 5G rollout could be affected due to the greater need for optical fibre cables in next-generation base stations.

The big question is how long does this coronavirus outbreak go on for? If the coronavirus isn’t contained soon and turns into a pandemic, there is likelihood of a global recession according to Moody’s Analytics.

Opportunities and threats for India

The coronavirus outbreak has definitely exposed vulnerabilities for global companies, especially those that rely heavily on China for their supply chains and products. This may force companies to cut some of their dependence on China, something that already started to happen because of trade wars. Here lies an opportunity for India to become a part of global supply chains, if our policymakers and entrepreneurs act quickly.

The impact of coronavirus outbreak will be felt on global steel industry for at least two to three years, as China is the largest producer of the alloy, Union Minister Dharmendra Pradhan said. The minister asked Indian steel companies to enhance output, particularly special steel, to grab larger global market share. “When some markets in the globe face pressure, its positive reflection is felt in some other markets” said Pradhan. India is the second largest global producer of steel with an annual output of over 106 million tonne, but lags much behind China that accounted for 928 million tonne of the alloy in 2018. China’s pain is India’s gain for steel industry.

Disruptions in China in other industries such as bulk drugs, chemicals, auto parts etc could also provide a window of additional opportunities to India, as US and European companies scout for alternate destinations to diversify their supply chains. Global buyers are also exploring the Indian market for ceramics, homeware and furniture.

Furthermore, Indian exporters of chemicals, engineering goods, and marine products will also benefit from the coronavirus outbreak. Fall in global crude oil prices on account of an anticipated slowdown in demand could result in a lower import bill for India.

But the risks posed to Indian economy by the outbreak of coronavirus are immediate. India imports electronics, auto components, pharma bulk drugs and consumer durables from China. About 67 per cent of electronic components and 45 per cent of consumer durables are imported from China. “Shutdown of factories in China due to n-CoV is expected to negatively impact the electronics industry in India as Indian players currently do not have the capability to manufacture such semiconductors and components in the short term, though some parts are sourced from Japan, South Korea, Taiwan, and Germany, among others,” rating agency CRISIL said in its latest report on coronavirus impact on Indian industry.

India imports 77% of its phosphatic fertilisers from China. A prolonged period of outbreak in China could lead to fertiliser shortage in India which will dampen agriculture output. A lot of Indian pharma companies rely on APIs (active pharmaceutical ingredients) sourced from parts of China that are worst affected by the virus outbreak.

If the virus epidemic continues for an extended period, Indian exports to China would also get hit, especially in areas like petrochemicals. India exports 34 per cent of its total petrochemicals to China. China is the second-largest trading partnerof India. The outbreak has the potential to derail bilateral trade worth $87 billion between the two nations. India imports goods worth $72 billion and exports goods worth $15 billion to China.

Imports from China are likely to contract more than exports to China and therefore, from a current account perspective, the outbreak could be supportive for India’s forexreserves. However, from a capital account perspective, a big global risk-off could result in capital outflows from Emerging Markets (EMs) including India.

“The coronavirus remains the critical risk as India depends on China for both demand and supply of inputs,” said Abheek Barua, chief economist at HDFC Bank. Indian economy is growing at a muted growth rate of sub- five per cent. The risks posed by supply disruptions of intermediate goods from China could dent India’s industrial output which contributes about 31% to India’s GDP. Agriculture production could also take a marginal hit, if there are shortages of phosphatic fertilisers due to supply disruptions from China. Consumption of goods like consumer durables, smartphones, etc in India could
also be hit on account of supply-chain disruptions. India’s fourth quarter GDP growth could take a hit of half per cent or so due to the impact of coronavirus, even though India is better insulated compared to other Asean countries.

(The writer is a retired corporate professional and a freelance writer)