How virus outbreak has hit world economy

Distinguished Fellow, Observer Research Foundation, New Delhi 

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OVER 70,000 confirmed cases of the Covid-19 virus and more than 1,700 deaths have been reported so far. China remains the principal location of the outbreak and the cruise ship Diamond Princess has become the second largest centre of infection with over 450 confirmed cases, followed by Singapore, Hong Kong, Japan and Thailand. There are a significant number of cases in South Korea, Taiwan, Malaysia Germany, Vietnam, Australia, US, France and Macao.

The economic impact of the virus is also now becoming clearer. Quarantine measures to check the virus have severely affected economic activity. Travel curbs all over the country have disrupted logistic networks and wreaked havoc on industries ranging from oil refining to tourism, hospitality services, civil aviation and manufacturing.

The Covid-19 outbreak has pushed down oil prices to their lowest level because of the disruption of travel and economic activity in the world’s largest oil and gas importer. According to one report, Chinese energy giant CNOOC has said it will have to suspend honouring some import contracts. Caixin has reported that weak demand has led to a rapid growth of inventory in refineries and such build-ups are also afflicting other heavy industries like steel and copper smelting.

The International Energy Agency has also lowered the 2020 demand growth by 365,000 barrels per day. This has a lot to do with the Covid-19 outbreak since China accounted for over 75 per cent of the global demand growth.

The outbreak has already hammered the weak auto industry where sales had been falling for the past two years due to the loss of incentives for electric cars and the slowing economy. In fact, says Yicai Global, as of mid-February, four-fifths of Chinas car dealers are still shut due to the epidemic.

Currently, many of the car manufacturing plants are also shut. Wuhan, the great Chinese industrial city, is one of the major centres of Chinese automobile production, with Nissan, GM, Renault, Honda and Peugeot having facilities there. But the most exposed automaker is Volkswagen which has some 24 plants accounting for 40 per cent of its production in China. Toyota which makes 15 per cent in China is also worried.

Besides, there are several auto component makers like Bosch, which has dozens of plants in China, including two in Wuhan. China is also the global hub for making electric motors, transmissions and other components of electric cars and it is not surprising that among those affected is Tesla which had begun delivering its Model-3 vehicles from its plant in Shanghai.

The greatest fear of the Chinese government is that the Covid-19 outbreak could lead to mass unemployment. For this reason, the central, provincial and local governments are emphasising measures to maintain stable employment through various aid measures, including tax cuts, loan repayment deferrals and the use of unused unemployment insurance funds. But the problem for local officials is that the twin tasks of containing the spread of the virus and keeping their economies up and running is proving to be too much.

If the crisis is not checked and factories, shops and restaurants unable to do business, it could add some RMB 5.6 trillion in new bad debt for lenders, effectively, trebling non-performing loans. For many small businesses, the Covid-19 outbreak is an existential threat. Caixin, a Chinese economic newspaper, cites a survey of 995 small and midsize companied conducted by Tsinghua University and Peking University after the outbreak and found that only 18 per cent or so could last three months with their current savings, and one-third could last one month and another third two.

Wang Tao, head of Asia economics and chief China economist at UBS, estimates that China’s GDP could plunge 1.5 per cent in the first quarter, assuming all companies are able to resume operations by the beginning of April with their current savings.

All this has had a ripple effect in curtailing Chinese tourists going abroad, disrupting China-centric supply chains and constraining economic demand in China. Among the countries most affected are Vietnam, Hong Kong, Singapore, Taiwan, Thailand and South Korea.

Among those affected is the auto industry, Hyundai was forced to suspend production at its plants in South Korea because the Covid-19 disrupted its supply of parts. Korea gets nearly 30 per cent of its car parts from China. Fiat Chrysler said it had suspended production at a factory in Serbia because of shortages of parts made in China. Meanwhile, the giant Mobile World Congress which was to be held in Barcelona has been cancelled because of Covid-19 concerns.

Opinion is still divided as to the overall impact of the Covid-19 on China’s economy and on that of the world. There are many who argue that this will be a short-term thing and will not have a significant impact on either. S&P Global, for example, says that the crisis will stabilise by April and there will be no new transmissions by May.

However, all that depends on the disease being brought under control. As of now, there is no indication that that is happening. Even now, there are no firm assessments as to when the disease will peak, which will be when the daily number of cases begins to decline consistently.

Even now, according to Chen Yixin, the deputy head of the ‘central guiding group’ in Wuhan, the government has not been able to get an accurate count of the number of people infected. The situation remains grim, a large number of health workers themselves have been infected and other parts of the province, and, indeed, China, are going into a quarantine lockdown.