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Impact of the coronavirus on the global economy

Published on
16 March 2020

According to the figures from mid-March, Covid-19 counted approximately 239,000 infected people and over 9,900 deaths worldwide*. The epidemic has accentuated the uncertainties that exist around the globe. What is the primary impact of the epidemic in terms of China and the country’s international exchanges?

We speak with  Jovana Stanisljevic, a professor of international commerce in the department of People, Organizations, and Society at Grenoble Ecole de Management.

What is the impact of the coronavirus on the global economy as compared to the SRAS epidemic in 2003?

The situation is very different from 2003. Following the SRAS epidemic, China represented 4% of global GDP and held 6th place in the world economy. Today, the country generates 16% of global GDP and is the second global economic power just behind the USA. China has also been the primary source of global growth for the past several decades, with a share of more than 39% in just 2019 alone. 

At this point, OECD estimates that Chinese GDP growth would fall below 5% this year. Additionally, the situation has now become a global health emergency, with epidemic spreading rapidly across the globe. The impact on the world economy is becoming more apparent, as global growth estimates for this year are being downgraded to 2.4% - down from 2.9%, as initially forecasted for 2020

Covid-19 impacts many industrial sectors and is causing growing issues in terms of supply around the world...  

Globalization has made China a key player in the most complex logistics supply chains. Companies around the world are dependent on Chinese supply and this is why the closure of factories in Chinese provinces has had such an impact on so many industries.

The South Korean automobile manufacturer, Hyundai, was the first non-Chinese company to announce a halt in production at factories located in its own region due to a lack of parts. In Europe and the USA, car manufacturers will soon be missing parts.

China is the leading exporter of electronic components (almost 30% of global trade). A halt in supply will have a strong negative impact on countries that depend on electronic components imported from China. For example, in 2019 Japan imported more than 45 billion dollars worth of electric and electronic components from China.

You also underline that China is the leading importer of raw materials...

China represented 80% of the global oil demand growth in 2019. Naturally, deep contraction of the Chinese industrial activity, coupled with drastic reductions in international and domestic transportation around the world, resulted in turmoil in the oil and energy markets. As a consequence, International Energy Agency (IEA) announced that the global oil demand will fall for the first time since 2009.

The Chinese industrial slowdown has also strongly impacted the copper industry as China is responsible for half of the global demand. This material is used in many industries, in particular automobile, mobile phone and electrical appliance industries.

A decrease in transactions for various sectors has led to many contracts with African or South American suppliers being delayed or simply cancelled due to recent “force majeure” events, which are independent of Chinese companies’ desires.

How has falling Chinese demand impacted the luxury, travel and tourism sectors?

The airline industry is facing a massive blow and is expected to experience losses that could average from $63 billion to $113 billion this year, due to the largest drop in air traffic since 11 years. Chinese tourists represent the biggest group of travelers worldwide. They tend to favor trips in Asia Pacific and mainly go to Hong Kong, Macau and Thailand. In 2019, Thailand welcomed 10 million Chinese tourists, or 30% of the country’s total visitors. Since the beginning of the epidemic, authorities estimate that 1.3 million trips have been canceled just for the months of February and March. But the impact in the tourism sector goes far beyond that, as the epidemic spreads globally. World Travel & Tourism Council (WTTC) estimates that 50 million jobs in the industry could be at jeopardy, out of which around 30 million in Asia, seven million in Europe, five million in the Americas and the rest in other continents.

Speaking of luxury industry, Chinese tourists are also strong consumers of luxury items. Since the beginning of the year 2000, Chinese consumers have massively moved towards high-end products, accounting for 33% of market share in 2018 and an expected 46% by 2025. The sector is currently facing its biggest challenge since 2008 as the primary luxury groups like Kerring, LVMH and Tiffany are more and more dependent on the growth of demand from Chinese clients.

How is the situation expected to evolve?

It really depends on how the virus epidemic will evolve. 
We can see that there are positive signals arriving from China where the contagion finally shows signs of slowdown. This means that work will be able to start up again in China and the country’ s industry, as well as companies that depend on it around the world will be able to reboot their activities. And actions taken by governments should make up for delays in productions.

However, if the virus continues to spread in China, Asia, Europe and other parts of the world, the global climate of uncertainty and its related challenges will continue to increase. Travel and logistics chains will continue to slow down or stop, creating more factory halts in China and elsewhere. Some multinational companies might try to rethink their supply chains to replace Chinese markets, yet we know from experience that this is easier said than done.

*Source : Les Echos, March 4 2020.

Article written March 2 2020 : Le coronavirus pèse de plus en plus sur l'économie mondiale, The Conversation

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