Coronavirus outbreak poses a great danger for the global economy

Corona virus epidemic

Now a global health emergency, as declared by the World Health Organisation (WHO), the coronavirus (COVID-19) outbreak will have a cascading impact on the Global GDP. A report by Dun & Bradstreet, estimates a hit of around 1 percentage point if the problem is not completely arrested by June, this year.

Reports suggest that despite a government stimulus, the growth in the Jan-March quarter will take a big hit, souring its growth prospects further. A commodities consultancy Wood Mackanzie in a note said that February will prove to be an economic write-off for China.

The impact of the epidemic on the Chinese economy would have been worse, had it been some other time, many reports have suggested. Business activity in China is usually slow around January on account of the Lunar New Year holidays. The Dun & Bradstreet report says that inventory planning by global businesses is generally factored in, around this time,and for this reason the impact has so far been muted.

The scale of impact on the world economy will depend on how the second largest global economy handles the situation considering 22 million businesses or close to 90 per cent of all active businesses in China, are located in the most-impacted regions, the Dun & Bradstreet report says.

This report was quoted in a news report filed by Indian agency PTI.

The ripples are being felt globally and certain sectors are likely to take more hits than the others. This is not a good news at a time when the top 10 major economies have shown sign of slowing down.

Countries have been issuing advisories putting travel restrictions to and from China to avoid any occurrence on their soil. This is hitting the global supply chains which are linked with China.

A report by Wall Street Journal says that the US business activity in February fell to its lowest level in more than six years as companies pulled back on fears that China’s coronavirus outbreak would slow global growth. The report quoted data gathered from IHS Markit.

It suggested that the US composite output index fell to 49.6 in February, down from 53.3 in January, and the lowest level since October 2013. The index is an aggregate measure of activity in the services and manufacturing sectors.

Amid the outbreak, the International Air Transport Association has warned of a deep downturn in earnings ofglobal carriers according to a New York Times report. The report sees the debacle owing to travel getting hit, in Asia.The virus outbreak could reduce global airline revenue by about USD 29 billion in this year, the report said.

Fast Moving Consumer Goods (FMCG) sector, automobile sector and the services sector pertaining to advisory may also be severely hit.

Countries including France have urged the local businesses to cut down reliance on Chinese raw materials and parts as the outbreak has exposed chinks in their domestic manufacturing.Japan South Korea and Germany are other countries, which are likely to be hit significantly.

Companies like Apple, Procter & Gamble and Adidas have raised fears of more global corporate troubles as a result of the deadly virus attack on China which has so far taken more than 2500 lives and affected over 60000 people. The virus has now spread in almost 30 countries.

India is not likely to remain untouched from the virus outbreak owing to the exhaustive trade relations that the two countries have. The bilateral trade between the two countries is around USD 90 billion with a trade deficit of over USD 60 billion, annually in favour of the Dragon country. This is testimony to the reliance of Indian businesses over the Chinese goods and services. China and Hong Kong together constitute 9 per cent of India’s export basket and over 17 per cent of India’s import basket.

Quoting the Dun & Bradstreet findings, the media reportfurther says that at least 220 Indian firms have legal linkages with around 350 companies in China. Around 58 per cent of these 220 companies are in the manufacturing sector, 40 per cent are in the services sector and the remaining 2 per cent are in the construction sector.

The pharmaceutical and electronics manufacturing sectors are heavily dependent on Chinese inputs and may see a hit if the epidemic is not controlled significantly.

Many Indian companies have already come out and said that they have inventories for the next 4-6 weeks, to assuage some fear building in the sector.

The Indian government and the Reserve Bank of India (RBI) are closely monitoring the developments in China. While the RBI Governor Shaktikanta Das is maintaining that the impact of coronavirus could have a limited impact on the Indian economy, the situation still needed to be closely monitored by the policy makers.

This is not a lone case of a virus epidemic in China. A similar problem occurred in 2003 during the outbreak of Severe Acute Respiratory Syndrome (SARS). The Chinese economy had slowed down by about 1 per cent during that time.

The extent of Coronavirus outbreak is much more severe than its predecessor. Moreover, the dragon nation is now the second largest economy accounting for over around 19 per cent of the global GDP (in 2018) as against in 2003, when itwas the sixth-largest economy and accounted for only 4.2 per cent of the world’s GDP.

Asian countries especially those in the neighbourhood of China will be impacted, depending upon the level of trade activity between the countries.  

The enormity of the situation is such that the International Monetary Fund (IMF) Chief Kristalina Georgieva in a recent blog post published on IMF’s website termed COVID-19 outbreak as the “most pressing uncertainty” facing the world economy right now.

“We did not anticipate in January” the international health emergency that now threatens to derail global economic growth, the blog said.

China’s current situation is of its own making. The country allowed the epidemic to reach to a proportion it is now at, despite warnings from ophthalmologist Li Wenliang.

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