Coronavirus and Economics
By: Hunter Huillet
The coronavirus has caused widespread panic throughout the world and bears strong resemblance to the SARS outbreak of 2003. While the SARS virus caused an estimated $40 billion economic loss, the coronavirus has the potential to cause much more damage as China has become more integrated into the global economy (1). While China has enforced many policies in an attempt to curb the spread of the virus, the virus has caused extensive economic damage in China that will spread to the global economy.
China is a critical player in the global economy and supply chain. It composes 1/5 of global GDP and is a key driver in financial, auto and electronics exports (2). Regional actors such as South Korea, and Vietnam, among others, depend on China as a source of consumption, tourism, and industrial parts. China is also responsible for the manufacturing of some of the United States largest companies. Apple, Walmart, Intel, and Costco have all had to scramble for new sources of production to avoid large shortages in the United States (3). In addition, asset and investment values have decreased significantly which has impacted the US stock market.
China and other countries have employed numerous methods to stop the virus. China has extended the holiday period for several days to prevent the disease from spreading to large manufacturing areas. US airlines have suspended flights to China for several weeks and foreigners coming to the United States from China are all screened for the virus before entry. Businesses have been shut down and people dare not leave their houses. One city even prohibited more than one member of each family from going outside for necessities (4). China has quarantined the Hubei province, where the virus started, as well as other cities that the virus has entered. In order to prop up the failing businesses, China has injected $22 billion into the economy (5). The effects may have lasting effects on China as many foreign companies have moved expatriates to safe locations and found new schools for their children.
While these methods may be helping to contain the spread, the situation has caused huge economic loss. Cities that make up 70% of China’s GDP have had their production disrupted for days after the holiday, shipping has been delayed, and transport costs have increased. Tourism and travel have come to a standstill domestic consumption has plummeted.
Other regions that rely on Chinese consumption have been hurt as well. Chinese oil consumption has dropped 20% and metal consumption has also dropped drastically (6). This has a disproportionally strong effect on developing economies that rely on these exports for their economies to thrive.
Song, Aly. 2020. Reuters. Accessed February 8, 2020. https://markets.businessinsider.com/news/stocks/china-gdp-growth-rate-slowest-since-1992-recession-due-to-trade-war-2019-10-1028610179
While the future monetary impact is unclear, the virus has already made some direct impacts. Soon after news broke about the outbreak, Chinese stock markets dropped 7-8 percent which amounts to about a $400 billion loss. The Dow Jones likewise dropped 3.7% (7). While China may not pay much attention to the stock market, the implications are worrying. Bloomberg reports that Chinese growth may fall to 4.5% on the year, significantly lower from the 6.1% growth it posted last year (8). Goldman Sachs projected the virus to lower US economic growth by 0.4% (9). JP Morgan expects the impact on the global supply chain to cut the global growth rate 0.3% down to 2.3%; the lowest since the recession in 2008 (10).
The world relies heavily on Chinese industry and exports and that crucial system is threatened by a virus that has proved to be difficult to contain. While many of these economic statistics are preliminary, they do foreshadow trouble for East Asia and the US economy; which may grow worse if the virus spreads and disrupts domestic US production.
(1) Brianna Abbott, Katie Camero and Mendell, Erin. “Coronavirus Is Declared a Global Health Emergency as Threat Rises Outside China.” Wall Street Journal, Jan. 30, 2020. https://www.wsj.com/articles/coronavirus-triggers-damage-control-from-governments-companies-11580396657
(2) Areddy, James T. “Coronavirus Closes China to the World, Straining Global Economy.” Wall Street Journal. Feb. 3, 2020. https://www.wsj.com/articles/coronavirus-closes-china-to-the-world-straining-global-economy-11580689793
(3) Goodman, Peter S. “SARS Stung the Global Economy. The Coronavirus Is a Greater Menace.” New York Times. Feb. 3, 2020. https://www.nytimes.com/2020/02/03/business/economy/SARS-coronavirus-economic-impact-china.html
(4) Wang, Orange. “Coronavirus: life in one Chinese city grinds to a halt with touchless KFC takeaway orders, closed communities” South China Morning Post. Feb. 5, 2020. https://www.scmp.com/economy/china-economy/article/3049113/coronavirus-touchless-food-orders-closed-communities-life-one
(5) Goodman, Peter S. “SARS Stung the Global Economy. The Coronavirus Is a Greater Menace.”
(6) Bermingham, Finbarr. “Coronavirus to test just how reliant the world is on Chinese manufacturers, with Asia braced for shock wave”
(7) Areddy, James T. “Coronavirus Closes China to the World, Straining Global Economy.”
(8) Hannah Dormido and Leung, Adrian. “Charting the Global Economic Impact of the Coronavirus.” Bloomberg. Feb. 5, 2020.
(9) Areddy, James T. “Coronavirus Closes China to the World, Straining Global Economy.”
(10) Lahart, Justin. “Ask a Doctor (of Economics) About Coronavirus” Wall Street Journal. Feb. 6, 2020. https://www.wsj.com/articles/ask-a-doctor-of-economics-about-coronavirus-11580990402