The economic impact

It looks increasingly plausible, even likely, that coronavirus will tank the global economy. Let’s take a gander at some recent headlines:

From the Fortune article:

Now, as coronavirus continues to spread, the region of China most heavily affected by the outbreak is a hub of global supply chains. A new Dun & Bradstreet study estimates that 163 of the Fortune 1000 have tier 1 suppliers—those they do direct business with—in the area. And 938 have tier 2 suppliers, which feed the first tier.

“That’s where it becomes troubling,” Nelson said. “It’s going to be that [item] where only one plant is qualified to make that and it’s going to interrupt a whole production line.”

Allow me to reference a blog post I wrote on the long-ago date of Feb 4. How many other people were writing about this at the time?

[Your humble author:] Mark Kern’s thinking about the global economic shocks being set in motion by the coronavirus outbreak is likely to prove prophetic, even if the virus itself doesn’t morph into a devastating pandemic:

On a related note, Asia’s gigantic work-from-home experiment continues in Japan:

From Sony to Takeda Pharmaceutical, top Japanese companies across industry lines are telling employees to work from home as the country continues to see a rise in coronavirus cases.

The outbreak has spread to nations across Asia in the weeks since it started in the Chinese city of Wuhan. With 66 cases [Ed: 132 now], Japan is among the countries with the most cases outside China, and the growing number of infections with no traceable links to the original epicenter have alarmed experts and government officials alike.

To keep employees out of large crowds, Sony urged staffers Tuesday to telework and avoid commuting during rush hour. It is suspending its usual 10-day monthly cap for working from home.

John Robb asks a pertinent question:

This thing is going to hit the US like a freight train and we won’t be ready for it.

Preparations have begun but they will almost certainly be inadequate.

CNBC: FBI has ordered $40,000 in hand sanitizer and face masks ‘in case the coronavirus becomes a pandemic in the United States’

13 thoughts on “The economic impact

  1. I think reports predicting that Coronavirus will decimate the global economy are premature. If coronavirus completely sacks the Chinese economy, that doesn’t mean global economy will crash. BUT we have to define “completely sacks the Chinese economy.” Also, if coronavirus impacts the world economy because of infections in the world, then that is a different story. My feeling still is, anyone predicting that the impact to China economy will crash the world is not accurate, but if they are predicting that there will be enough cases outside of China to wreck the world economy, I would say that is possible, but of course, we have no way of predicting now how many cases there will be and where.

    • I find your lack of pessimism disturbing. China accounts for, what, one quarter of global GDP growth? So a sharp contraction in China alone will put a serious dent in global growth. And that is to say nothing of the severe disruption to global supply chains caused by the factory shutdowns in China, which will devastate many companies in the US and elsewhere. And as you point out, it’s a different story if this becomes a worldwide pandemic. With Northern Italy now paralyzed by the virus, it’s apparent that containment has failed. Coronavirus has gone planetary. There are probably many thousands of undetected cases in the US already. This is going to slaughter the economy. But I’ve been wrong before.

        • China is 93% of global GDP. No one is predicting that China’s GDP will reach zero. a 20% loss of GDP in China would equate to a 1.8% loss in global GDP, HOWEVER if manufacturing reshuffles from China to another country, China’s GDP would drop, while global GDP would not. So a 20% decline in China’s GDP would cause global GDP to decrease by only some fraction of 1.8%.

          • Isn’t the issue growth, as opposed to total GDP? China accounts for something like 25% of global GDP growth. For the sake of argument, let’s say this virus reduces China’s 2020 growth to zero. That would cut global GDP growth by 25%. Given that the IMF projected the global economy will grow by 3.3% in 2020 (so $2.64 trillion if we assume the global economy is ~$80 trillion), that would wipe out $660 billion in global growth. And that’s before we account for the massive economic shocks that will be caused by supply chain disruption emanating from China. Your comment implies that relocating manufacturing from one country to another is instantaneous and frictionless. It is not. The supply chain will eventually reconstitute itself but in the short term there will be severe damage. You can’t simply shut down the planet’s manufacturing hub without wreaking havoc on the world economy. There are many American (and other) companies across a wide panoply of industries that are dependent on China for critical parts and are in serious trouble right now as they cannot fulfill orders or need to delay shipping. If China’s factories restart in earnest over the next few weeks, then we may dodge a bullet, but I don’t know how likely that is.

          • We haven’t even talked about the impact on global tourism. France’s tourist numbers are already 30 to 40% less than expected. Tourism accounts for 8% of France’s GDP.

          • I made a mistake. I meant to say China is 14.4% of global GDP. Looking at both China’s contribution to the size of the global economy and China’s contribution to global GDP growth is sort of like double counting. If we give a 20% haircut to China’s GDP, then that would represent a drop in less than 3% of global GDP. A significant percentage of that 3% would be regained by shifting businesses to other countries. And as for GDP growth, it would have a similar impact on GDP growth. China would take a 20% cut but India, Vietnam and whomever would all have more growth than usual and that would make up for most of it.

          • Correction noted, but I think you are vastly underestimating the economic ripple effects of this virus. The impact on the global airline, tourism and retail industries alone will be significant. As for manufacturing, there will be a long-term benefit for countries that can capture production migrating from China, but in the short term (this year), corporations are going to take a big earnings hit as their supply chains are thrown into chaos and they scramble to retool. Apple for example is already saying it will miss its fiscal second-quarter revenue forecast because of the supply issues in China. I don’t see how this situation doesn’t inflict economic damage beyond China’s borders, with a decent chance of triggering another global recession. Maybe we are talking past each other here. To be honest, I’m not sure I understand what your argument is. Are you saying that the world would shrug off a 20 percent contraction in China’s GDP (loss of ~$2.5T) because other countries would immediately generate >$1.25T in additional output? If so, that seems… optimistic to me.

          • ” the global airline, tourism and retail industries alone will be significant. ” Agreed. They will get a lot of back next year, but this year is done. Also because much of their income for the whole year is Chinese New Year and now that that has come and gone, they can’t get it back. My 8 part video series on the economic impact of the coronavirus is considerably longer than my post here. But did address this point. Chinese New Year is the equivalent of Christmas for retailers in the states or florists in US who earn half their money on Mother’s Day and if it rains that one day, their income is cut for the whole year.

            “As for manufacturing, there will be a long-term benefit for countries that can capture production migrating from China, but in the short term (this year),: Yes, this is called frictional loss. I addressed this, in the short term there will be loss. Also, the cost of relocating will be an additional expense and it will take time to get up to speed in a new country. But remember that demand should remain the same, which means there will be orders, products will be needed and industry will find a way to complete those orders.

            Also keep in mind, demand in China will not hit zero, travel, leisure, and luxury goods demand will not hit zero. It will decrease. Right now, for example auto dealers in China are down 90% compared to last year, but when the country gets back to work they will recover some of that as pent up demand and probably finish out the year with less orders and less income than last year, but not zero.

            Apple: We have just established that manufacturing is down and some companies cannot complete orders NOW and that income is low NOW, but because demand remains relatively constant, the income will be made up once they figure out how to manufacture and fullfill orders. “Apple for example is already saying it will miss its fiscal second-quarter revenue forecast because of the supply issues” So, demand for Apple phones remains fairly constant. And the company will find a way to full fill that demand, most likely by shifting manufacturing to another country.

            “I don’t see how this situation doesn’t inflict economic damage beyond China’s borders,” Has someone made that claim? I certainly didn’t. I said, have said and will continue to say… Short term, this will negatively impact everyone short term but will impact China long term. My original statements in early February were that if business got back to work before end of first quarter even China could recover. Now, it looks like that is zero percent likely and that second quarter will also be a bust, in which case, it is unlikely China will recover this year. The rest of these companies will most likely shift manufacturing elsewhere. They will take hits, they will have additional expenses and will lose some of their China revenue, but I don’t see why they wouldn’t recover. Unless the world no longer wants Apple products, then the demand should remain the same irrespective of what the supply is right at this minute.
            “, with a decent chance of triggering another global recession.” By definition, a recession is two quarters of negative growth. China will almost certainly have a recession, the world probably will as well, but that doesn’t mean that the world will have a negative long-term outlook. By third quarter or fourth quarter the world may be back to a new normal. All of what I am saying here is predicated on the existing situation with the China economy, I am not predicting or figuring in what happens if the whole world has to go on lock down to prevent the spread of the virus. If that happens, of course that could very bad.

            “Are you saying that the world would shrug off a 20 percent contraction in China’s GDP (loss of ~$2.5T) because other countries would immediately generate >$1.25T in additional output? If so, that seems… optimistic to me.” No, I did not say that.

            This is what I said. “I made a mistake. I meant to say China is 14.4% of global GDP. Looking at both China’s contribution to the size of the global economy and China’s contribution to global GDP growth is sort of like double counting. If we give a 20% haircut to China’s GDP, then that would represent a drop in less than 3% of global GDP. A significant percentage of that 3% would be regained by shifting businesses to other countries. And as for GDP growth, it would have a similar impact on GDP growth. China would take a 20% cut but India, Vietnam and whomever would all have more growth than usual and that would make up for most of it.”

            It does not contain the word immediately. Neither have I implied immediately, in fact by using such terms as short term and long term, first, second, third and forth quarters there is an implication that I did not say immediately.

          • Thank you, Mr Isaacson. Yale doesn’t create gentlemen, they chip away the dust of the world, revealing the gentleman that was always there.

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