Deadly coronavirus fallout: Global economy with tough recovery

The coronavirus that causes covid-19 is a minute, spotted destructive ball that’s not even alive. But, in its machine like way it’s beating every effort to control its spread. As per Bloomberg tally, more than 100 nations had reported infections and almost 4000 people had died. On March 11, the WHO declared the outbreak a pandemic different from its older cousin SARS and MERS.

As covid-19 expose its toll on the economy; business activity, profits and stock prices have descent. N95 mask have become deficit. The most precious commodity? Distance. There is a need to stay more than a cough’s distance away from others. Coronavirus updates as of 17 March 2020 is given in figure 1.1

Figure 1.1

The ongoing spread of the virus has become one of the biggest threat to the global market and supply chain. It has rocked markets worldwide having its various consequences which are discussed below:

  • As far as electronics is concerned, the TVs, smartphones, home appliances, air conditioner is going to be more expensive because of disruption of the supply of components from china. Retail prices of this commodity could go up by 3-10% and also there is an import hike.
  • Arvinder khurana, National President of All India Mobile Retailers Association, says that mobile components like display of mobiles and batteries can go up by Rs 500-800. Also, Xiaomi has increased price of Redmi Note 8 by Rs 500 which is a steep increase.
  • Xiaomi is expecting a risk as far as components are concerned and are exploring alternatives supply Channels for components and raw materials
  • OPPO expecting production to settle down in the coming week and have localized solution at their factory to support timely production.
  • VIVO said in the past that they have absorbed price hike that are coming because of change in duty and inflation and shall continue to do as much as possible
  • Key drug raw materials such as paracetamol as well as antibiotics have seen the raw material prices spiked by anywhere between 20% to even 50%.
  • A shortage of 30% in raw material supplies can be seen especially for a key andreen ingredient for paracetamol.

IMPACT on global economy: – It is impacting the global economy in ways that are discussed below:-

  • Direct impact on production: -Shutdown in Hubei province and other areas has substantially affected Chinese production. It has effects on exporters too. Major importers of china like japan, Korea and other Asian countries will experience slow growth in the first half of 2020.
  • Service contraction: – The virus outbreak in China has impacted the country’s services industry as reduced consumer spending hurt retail stores, restaurants and aviation among others. The services sector in the U.S., the world’s largest consumer market, also contracted in February due to reduction in new business from abroad as customers held back from placing orders amid global economic uncertainty. 
  • Market and supply chain disruption :- Most of the manufacturing firms dependent on imported intermediate inputs from China and other affected countries are facing difficulty as they are not able to easily switch sourcing. Small and medium sized firms may face great difficulty in surviving the disruptions. Also, businesses tied to traveling and tourism industry are prone to losses that are expected to be not recoverable.
  • Financial impacts on financial markets and firms: – Fear surrounding the impact of COVID-19 on the global economy has hurt investor sentiment, there is a possibility of significant decline in equity markets and corporate bond markets, with investors preferring to hold government securities, particularly US treasuries, were considered safe haven assets but now yield on all such contacts fell below 1% in the past few week – a development which was not seen before.
  • Shrinking oil prices: – China, being the world’s largest crude oil importer has impacted the oil prices. A reduction in global economic activity has decreased the demand for oil, resulting oil prices to multi-year lows. That happened much prior to the disagreement between OPEC and its allies caused the latest plunge in oil prices.
  • Downgrades in economic forecasts: – Ithas led major institutions and banks to cut their forecasts for the global economy. The OECD downgraded its 2020 GDP growth projections for almost all economies. It is explained in figure 1.2.
  • Others :- (1) Possibility of Global GDP stagnation, falling of international trade and a global recession. (2) Delayed production schedules and shipments might create financial problems for those companies with heavy debts, especially in the US. (3) Closure of school and social distancing might reduce the available labour force in an area.
Chart: OECD GDP forecasts 200311

  FIGURE 1.2 OECD Economic Outlook Report

How much could it impact the GDP?

It can bring the world economy to a standstill. The outbreak could include recessions in Japan, euro area and US; and a total of $2.7 trillion in lost output –equivalent to the gross GDP of UK. That’s the most worst of the four scenarios developed by Bloomberg Economics.

Future Risk

This is a crisis moment for the economy, there is going to be an increase in the credit defaults for companies with low liquidity and high maturing debts. In the long term, companies should work on converting crisis management into risk management. Its high time businesses should think of diversifying their supply bases and executives should work hard to make their supply chains more resilient.

The Requite

The Requite

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