Coronavirus: the economic consequences
Monday 17th February 2020
From December 2019 an outbreak of a novel coronavirus was identified in Wuhan, Hubei Province, China. Since then, the virus has spread internationally, with cases reported across Asia, Australasia, Africa, Europe and North America. Aside from the serious public health consequences associated with this outbreak, there are a number of economic consequences worthy of note.
In many ways, the medium-to-long-term effects of this novel coronavirus (now named COVID-19) in economic terms are hard to determine at present. This is chiefly because these will be dependant upon the ongoing management of the outbreak globally and the timing of any medical developments in combating COVID-19. Such medical developments are fast-moving at times of crisis such as this.
What is clear, however, is that there will be notable economic disruption felt in the short-term. In the context of the ongoing US-China trade war, the Chinese Government announced that tariffs on 1,700 US products will be substantially cut from February, as the country battles the virus outbreak.
Cathay Pacific, the flag carrier airline of Hong Kong, recently issued a profit warning. The carrier had already seen a 46% year on year decline in traffic to Hong Kong in November and December 2019, owing in part due to the Hong Kong protests observed throughout 2019. Following the profit warning announcement, The Guardian reported that Cathay Pacific had been forced to cancel 40% of flights in February and March owing to the coronavirus outbreak. This followed the airline asking 27,000 of its employees to take unpaid leave in a measure aimed at reducing costs.
Elsewhere, the BBC News reported that Apple “is the first major US company to say that the epidemic will hit its finances.” The tech giant said that “worldwide iPhone supply will be temporarily constrained”. Apple said in a statement that it did not expect to meet its forecast record revenues this quarter, noting that the company was “experiencing a slower return to normal conditions” than expected.
It is also thought that British construction equipment manufacturer JCB is the first major UK manufacturer to warn of the impact COVID-19 will have on its business. The company – well-known for its black and yellow painted diggers – announced a suspension of overtime and reduced working hours for thousands of its staff. It comes as the BBC News reported that “[over] 25% of JCB's suppliers in China are closed”.
Coffee chain Starbucks has closed half of its shops in China, and reportedly decided against upgrading its annual profit forecasts – a move contemplated after it saw first quarter performance that exceeded expectations.
With China being the world’s second largest economy by GDP, it is not unexpected that such a significant disease outbreak there would have such substantial economic consequences. However, looking beyond China, it is clear that the interconnectedness of the global economy has transmitted these effects internationally. Indeed, The Guardian last week noted the recent volatility of the Tokyo stock market (measured by Nikkei 225 Stock Average) and fall in the Shanghai stock market (Shanghai SE Composite). Additionally, there was a sharp fall in oil prices as the COVID-19 crisis escalated – perhaps to be expected given that China is the world’s largest importer of crude oil.
As the examples of Apple, JCB and Starbucks above illustrate, the reliance of other economies on that of China means that the short-term disruption caused by coronavirus will take effect across the globe. The extent to which these impacts will plague the global economy in the medium-to-long term will hinge on the medical and public policy responses to COVID-19 going forward.
