Coronavirus Begins to Spread Economic Gloom Worldwide

Supply chain disruptions are upsetting markets globally, but especially in Asia.

By Keith Johnson, a senior staff writer at Foreign Policy.
South Korea’s Hyundai
South Korea’s Hyundai, whose facilities are pictured here on Feb. 10, and other automakers around the world have suffered production outages as the coronavirus outbreak upends supply chains. Yelim Lee/AFP/Getty Images

The cascading economic impact of the new coronavirus outbreak in China is becoming more apparent worldwide, with Apple’s surprise cut to its sales forecast due to supply chain disruptions spooking global markets and Asian governments downgrading growth prospects. German investor sentiment, meanwhile, is collapsing amid fears the outbreak will kneecap the incipient recovery in global manufacturing.

The fallout from the outbreak of the virus and China’s efforts to contain it—with more than 70,000 known cases and more than 1,800 deaths so far—comes at a particularly bad time for economies like Japan and Germany, which were just beginning to recover after a year of global trade tensions weighed on their manufacturing and exports. The virus has hit the global automotive industry particularly hard, which has a nasty knock-on effect not just inside China but also in Japan, South Korea, Germany—and potentially even the United States.

Despite China’s insistence that the rate of new infections is stabilizing, alongside an ostensible return to business earlier this month, the economic damage is most apparent inside China. Some sectors, like automobiles, are still all but shuttered as factories deal with worker absences and supply chain shortages and most car dealers remain closed. Other sectors, including mining, travel, construction, and retail, are also taking a big hit as Chinese consumers and workers, limited by travel restrictions and fears of infection, have halted most of their usual activity.

“It seems increasingly likely that February will prove to be an economic write-off for China,” said the commodities consultancy Wood Mackenzie in a note.

Most forecasters expected the Chinese economy to take a big hit to growth in the first quarter before recovering—thanks to government-fueled stimulus—later in the year. But sentiment about China’s growth prospects is souring: The new Bank of America fund managers survey shows top investors expect Chinese GDP growth rates to stabilize just over 5 percent per year for the next three years, a big drop from last year’s already sluggish 6 percent and a far cry from the halcyon days of double-digit growth less than a decade ago.

Chinese recovery could prove elusive despite Beijing’s efforts to boost lending and lower interest rates, Wood Mackenzie said. Small and medium-sized businesses were meant to keep paying salaries for absent workers during the shutdown, but many won’t be able to as their own revenues are squeezed. That means less disposable income for consumers down the road—turning what should have been a temporary pause in domestic demand for consumer goods into potential permanent demand destruction, the consultancy said.

And even though most of the virus infections and deaths have occurred inside China, the economic fallout is becoming increasingly visible among its Asian neighbors. On Tuesday, South Korean President Moon Jae-in essentially declared an economic emergency, calling for desperate measures to limit the damage to an economy deeply intermeshed with China’s. Singapore, for its part, slashed its growth outlook this year and is planning a multibillion-dollar stimulus package to offset lost economic activity. Thailand and Malaysia, too, have cut their own growth expectations, and Malaysia is planning an economic stimulus of its own to contain the damage.

But Japan, which has the most virus cases outside China, might be facing the biggest challenges after an already dismal fourth quarter showed a shrinking economy, with the biggest contraction in more than five years. Japanese automakers like Toyota and Nissan have seen output disrupted both at Chinese factories and at home, while inbound Chinese tourism is paralyzed for now. That raises the real risk of a recession for Japan, which just launched a huge economic stimulus package late last year and may need to prime the pump even further to avoid a full-blown crisis.

Even further afield, the virus is taking its toll. Chinese companies working on projects for the Belt and Road Initiative around Southeast Asia will almost certainly suffer delays and higher costs as supply-chain and worker disruptions percolate through to projects on the ground. Brazil, which relies on the Chinese market as its largest trading partner, will likely see slower growth this year due to the fallout from the outbreak. And, of course, the slowdown will likely derail U.S. plans to massively increase exports of farm produce, energy, and manufactured goods to China, which could delay any real recovery in the distressed Farm Belt and Rust Belt.

And Europe, too, is starting to worry. European automakers such as Volkswagen have already seen production affected at factories inside China, and now there are growing concerns of additional supply chain disruptions that could affect manufacturing in European plants.

Investors in Germany fear the worst, after a dismal year for Europe’s biggest economy, mired in a manufacturing slump thanks to a dire outlook for its key auto sector. On Tuesday, the ZEW survey of German investors showed a collapse in sentiment, with fears that the virus and its knock-on effects in China will upend global trade and hamstring Germany’s export-led recovery.

The gloomy outlook briefly sent the euro to almost three-year lows against the dollar—which, given U.S. President Donald Trump’s constant tirades against unfair competition from lesser-valued foreign currencies, only threatens to ratchet up trans-Atlantic trade tensions even further.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP