How is COVID-19 Affecting the Global Economy?
- Maslow Trainers & Consultants
- Mar 11, 2020
- 5 min read
Updated: Mar 12, 2020
Introduction
COVID-19, otherwise known as (SARS-CoV2) is an infectious disease that began in late 2019. The disease is very similar to the outbreak that the world faced in 2002, the Severe Acute Respiratory Syndrome (SARS) outbreak. Medical experts are relating the of Covid-19 outbreak to that of the SARS outbreak. However, Covid-19 has a much lower fatality rate than that of the SARS epidemic. Also known as the Coronavirus, the virus originated from a wet market in Wuhan, the central capital of the Hubei province of mainland China. The virus is allegedly to have come from a pangolin that was likely to have been infected by a bat through contact which was then consumed by humans in Wuhan. The government of China commenced a lockdown on Wuhan on the 23rd of January 2020.
To date, the disease has spread to at least 80 countries and has infected over a 120,000 people worldwide (taken from 11th March), with more than 3,000 deaths. Outside of China, the three major countries that were hit is South Korea, Italy and Iran. South Korea is the worst in Asia besides China with a reported number of over 7,640 cases and at least 32 deaths. In Europe, Italy has been hit with a reported amount of over 10,077 cases and at least 79 deaths. As for the Middle East, there were a reported number of over 8,011 cases and at a minimum of 77 deaths in Iran. To put into context, the other countries surrounding South Korea (barring China), Italy and Iran don’t even account for 10% of the number of cases reported in the aforementioned countries. Having said that, only Cambodia, Nepal, Sri Lanka and Vietnam have a 100% rate of recovery whereby everyone who had contracted the disease had experienced a full return to health.
Having said that, many countries have barred the entry of Chinese nationals into their country, for fear of the virus spreading. However, China has seen recent success in containing the virus, having already seen a decrease of infections per day, a significant deviation from their previous numbers of infections per day by as much as a 40% decrease.
In a globalized and modern marketplace as such, there’s bound to be a trade or movement of people, so just how badly does this virus affect industries?
The Business Impact
The COVID-19 outbreak has seen companies slashed their forecasts on growth for Q1 of the year with a potential spill-over into Q2 and Q3 as well. In a world that’s becoming increasingly interdependent on its goods and services, the manufacturing hub of China has seen production slow down if not to a halt due to the outbreak of the disease. Other than that, other industries suffering greatly are retail, tourism and hospitality. These three industries have taken a great hit during these times as a result of COVID-19.
Apple, the giant smartphone manufacturer, has admitted that it may face a shortfall in profits during Q1 due to a shortage of supply because of the shutdown of facilities in China. The shutdown of Apple facilities in China has forced them to lower expectations of their Q1 sales figures, though the iPhone 11 models were gaining serious traction, it is a big setback for the world’s most valuable tech company.
Companies that have relied on production in China have seen their production come to a temporary halt due to a supply chain disruption. Hyundai Motors is one of the first global carmakers to halt production in South Korea due to a shortage of components to manufacture their vehicles from China. “Carmakers will face severe parts-supply issues, something companies didn’t encounter during the SARS period,” said Cui Dongshu, secretary general of China’s Passenger Car Association, referring to the 2003 outbreak. “Wuhan is the most cost competitive among China’s car-industry hubs, therefore many parts makers produce components there and supply their clients around the world.”
$113 billion – that is the worst-case scenario that airlines can face in revenue losses this year due to the outbreak. Travel restrictions, lower demand in flights and flight cancellations play significant roles as to why the commercial carriers would experience this loss. In a best-case scenario, airlines could face up to $63 billion in losses due to the outbreak. A majority of these losses would come from severely hit countries mainly in China, South Korea, Italy, Germany, Japan, Singapore and Iran. Despite travel fears, the International Air Transport Association (IATA) said in general, “travel bans did not stop the spread of the disease, and it was eager to reassure people it is safe to fly.” The IATA also mentions that no travelling is worse than travelling due to the fact that airlines could face huge losses with the outbreak. On top of that, airlines that have already been struggling or were on marginal profits may face bankruptcies, the financially stronger airlines will take a hit of course but it will be less impactful than the struggling ones.
The retails sector could be looking at a double-edge sword in terms of its market share. On one hand, brick and mortar stores are not performing and that’s the market expectation when it comes to the COVID-19 outbreak. Major retailers such as Walmart and Target experience customers’ stockpiling commodities that are necessities and that have been recommended by the Centers for Disease Control and Prevention (CDC). Aside from that, consumers are avoiding retail shopping and instead are opting for online deliveries for the groceries as well as their food. Even so, it is driving innovation from companies like McDonald’s and Starbucks, who are pushing their delivery services that minimize human-to-human interactions, and they ensure that the packages orders are free from contamination. E-commerce within countries are thriving, but e-commerce exports from China are suffering. Popular Chinese e-commerce sites, Alibaba Group Holding have seen a lack of deliveries in their shipments due to the restrictions on the shipment of items into countries due to the fear of contamination from the virus.
In the tourism sector, just before the 2020 Spring Festival that was to be held in China back in January, the outbreak began. With the industry experts having a forecast of over 450 million travellers, the figures didn’t even hit 152 million travellers. In comparison to the 2019 Chinese Spring Festival, the number is down by 64%. 2020’s loss on the Spring Festival could amount to as much as $80 billion USD. In total, if the outbreak keeps up till Q2, it is possible that China could experience a loss of up to $432 billion USD, according to the Chinese Center for Recreation and Tourism Research. Having said that, the amount of losses for the year would account for 10 times as much of losses during the SARS period, which makes it paltry in comparison. In addition to that, Indonesia, a country with over a quarter of a billion citizens, forecasted as many as 10 million Chinese tourists with an expected revenue of $4 billion USD. Once the outbreak hit, forecasts in Indonesia took a pessimistic turn and has since dropped in number of tourists and revenue. Tourism in the country took a steep turn for the worst which results in Chinese-speaking tour guides losing their jobs.
Since the lockdown of Wuhan, companies that have any supply chains linked to China and apply the system of just-in time manufacturing has left them exposed to the fact that they do not currently stockpile their inventory. This has severely impacted many businesses, not just from delivering the products but from the supply chain. On top of that, this has shown the shortcomings of the Southeast Asian countries’ growth models. An excessive reliance on China has been a rude awakening for companies and countries that have a majority of their trade coming dependent on China for its raw materials and productions.
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