Different virus, different times

The novel coronavirus or Covid-19 seems to be fast turning into a pandemic with more countries falling prey to this mysterious virus, which began its journey in the central province of Hubei in China. As of March 3, 2020, the World Health Organisation reported more than 92,000 cases worldwide and a death toll of 3,100. Most cases are in China: 80,151 confirmed cases and 2,943 deaths. Italy has reported 79 deaths and more than 1,835 confirmed cases; the U.S., eight deaths and 27 confirmed cases; and Germany, 188 cases of infections. In the Middle East, Iran with 77 deaths and 2,300 confirmed cases is the most hit; Iraq has reported 54 deaths.

In 2003, during the Severe Acute Respiratory Syndrome (SARS) epidemic, which too originated in China, the situation was not as severe and the outbreak did not hit pandemic proportions. There were 8,098 reported cases of SARS and 774 deaths. The outbreak was contained within the South East Asian region.

In today’s world, what decides the impact and the spread of an epidemic are the air travel trends of the infected. Today there are few things in the global economy without some Chinese connection. Hence, along with China’s economic heft has risen air travel traffic to and from the country, which at $14.4 trillion, is the second-largest economy in the world. China’s share in the global GDP or total output, which had been just around 4.3% in 2003, was around 16.3% in 2019.

Most economists and global banks forecast China’s growth at 4.5% for the first quarter of 2020 and 6% for the overall year based on the current impact of the outbreak. The International Monetary Fund has revised down the global GDP forecast by 0.3% to 3.2% in 2020 because of supply disruptions. If China is not soon back on its feet, its growth could be revised further to 5.5%, as a report by the HDFC Bank titled Assessing the Impact of the Covid-19 points out, and that will reflect in the global economy, too.

During the SARS outbreak, China’s GDP slipped to 9.1% in Q2 from 11.1% in Q1 of 2003 and back again to 10% in Q3 of 2003, but nowhere close to the 4.5%-figure forecast today, the worst since the financial crisis of 2007-08.

It is unlikely that Chinese manufacturing will rebound as fast as it did during the SARS crisis, not just because the numbers of affected people are much more but also its impact is far more widespread. Latin America, which has trade relations worth $307.4 billion (as of 2018) with China, will suffer because of its inability to export raw materials and commodities to China like copper and crude oil, soybean, and other agricultural products and also lose out on funding from Chinese banks. Moreover, commodity prices will see a substantial fall as consumption takes a hit, in the absence of the biggest importer.

Hong Kong remains particularly vulnerable to external demand weakness, given its reliance on tourism and dependence on the Chinese economy. “Many sectors (tourism, retail, hotel, catering, and transportation) have already taken a blow from the months of disruptions to business. Not to mention that a high level of uncertainty also significantly impaired business confidence and suppressed investment demand,” argues a recent Bank of America Merill Lynch report. Hong Kong, says the report, is facing a “prolonged recession’’ and can see a 2.1% contraction in 2020 compared to 2019. Thailand and Singapore could also see a hit in its retail and tourism sectors.

But the biggest fallout will be felt by companies dependent on China for cheap raw materials, intermediate goods or even critical parts of machinery from “the factory of the world”. It has also caused headaches for global companies such as Adidas, automakers like Ford, General Motors, food companies such as Procter & Gamble, tech majors like Apple. Any slowdown will not only hit their manufacturing schedule but also cut down sales in one of its biggest markets in the world.

Though half a dozen nations have been affected, officials are yet to call the Covid-19 crisis a pandemic. If the crisis persists, Europe and the U.S. could go into a recession in the first half of 2020, according to Mark Zandi, chief economist at Moody Analytics. “The economy was already fragile before the outbreak and vulnerable to anything that did not stick to the script. Covid-19 was way off the script.”

Hence, projections based on the SARS experience are unlikely to help and there is a need for a globally concerted effort to tackle the crisis. While many central banks have cut interest rates—the US Federal Reserve has cut its interest rate by half a percentage point—the issue here is whether a rate cut will reduce supply-side challenges, especially at a time when interest rates are very low. It seems rather difficult because no amount of low interest rates can bring greater supply into the market.

India, which depends on China for supplies for manufacturing needs (be it electronics, solar panels or pharma), could see imported inflation if it is forced to buy goods from other parts of the world at higher prices. India has faced similar challenges in the case of food items.

Diversifying the supply chain for goods and having a greater focus on “Make in India” through the right kind of policies and ecosystem is a much better solution in the long run. Otherwise, such Black Swan events can disrupt even the best of economies.