Issue of the week: the corona threat
Covid-19 has already heavily disrupted global supply chains. How bad could things get?
The threat posed by the coronavirus to global businesses appears to be intensifying, said Daisuke Wakabayashi in The New York Times. Global stocks dipped this week after a sales warning from Apple, which is “widely regarded as a bellwether of global supply and demand for goods”. The iPhone-maker, which is “highly dependent” on both Chinese factories and consumers, noted that “production is ramping up more slowly than expected” as China attempts to re-open factories – hampering supply of its smartphones. Apple is far from the only company contemplating extraordinary measures because of failing supply chains, noted the FT. The boss of Jaguar Land Rover, Sir Ralph Speth, admitted that the carmaker had resorted to “flying components out of China in suitcases” (it is running out of key fobs in particular) in a race to prevent its UK plants from closing at the end of the month.
Most economists have so far “only nudged down their forecasts for full-year global growth”, said The Economist. And stock markets have, on the whole, continued to climb higher. Let’s hope “their optimism is justified”. History provides little guidance. China’s economy has grown from 4% of global GDP to 16% since the Sars epidemic of 2003. It has also “become enmeshed in supply chains of mind-boggling complexity”, while “just-in-time production leaves little room for delays”. Many firms cannot trace all their suppliers, making it hard to predict the impact of stoppages on their output, let alone global growth. China churns out a third of the world’s chemicals, half its LCD screens and two-thirds of its polyester. “Companies that think they are isolated could be in for a surprise.”
Sars’ fatality rate may be higher than Covid-19’s, “but economically speaking, the new coronavirus is far more deadly”, said Carey Huang in the South China Morning Post. Even at this stage, it’s obvious that the economic impact will be more severe than that of any other previous epidemic. “Whole cities have been locked down” – and “the nightmare may be just beginning” for millions of small Chinese manufacturers if foreign customers shift orders to other countries. “If the disruption goes on long enough, it could trigger a wave of bankruptcy among SMEs”, which contribute more than 60% of China’s GDP and account for 80% of jobs. That, in turn, will weigh on banks, adding “pressure to the country’s towering debt pile”, which stood at 300% of annual GDP late last year. “The worse-case scenario cannot be ruled out.” If this epidemic isn’t contained soon, “massive financial collapse, an exodus of foreign companies and large-scale bankruptcies all loom on the horizon. In short, nothing less than economic meltdown.”