The Snowball Effect of Coronavirus on Global Economy

Published February 4th, 2020 - 10:07 GMT
The Snowball Effect of Coronavirus on Global Economy
Other countries are also restricting access (particularly of people) to and from China. (Shutterstock)
Highlights
Thousands of flights within China and many international flights have been canceled.

The World Health Organization on Thursday declared the coronavirus outbreak to be a public health emergency. As of Monday, more than 14,300 known cases had been identified and at least 361 people had died.

This brings the headcount of affected people above that of SARS, but the death rate has so far between 2 and 3 percent, which is well below SARS.

The Chinese government has done a fine job quarantining the city of Wuhan, which has 11 million inhabitants, as well as neighboring cities. The virus first hit during the Chinese Lunar New Year, when people travel to see their families. This probably enabled the spread of the disease throughout the country. Now, all provinces have identified infected people. The spread overseas has been contained so far — Japan, Thailand, Australia, Singapore, Taiwan and South Korea show the most cases, ranging between 10 and 20 patients.

Aside from the human tragedy, the economic consequences are real. On Monday, Chinese markets opened for the first time since the New Year celebrations and they fell just short of 8 percent. Hong Kong had fallen 6.5 percent last week and rebounded ever so slightly on Monday.

The SARS outbreak of 2003 knocked 2 percent off Chinese economic growth, but we can expect the impact of coronavirus to be bigger. China was not as intertwined with the global economy then as it is now. In 2018, its trade volume was just shy of $25 trillion. China is integrated in global supply chains, particularly in the automotive and technology industries. Just one example is that virtually all of Apple’s iPhones are manufactured in China. Three hundred of the world’s 500 largest companies have a presence in the city of Wuhan, which was the center of the outbreak.

Thousands of flights within China and many international flights have been canceled. Russia has sealed its 4,200 kilometer-long border with China at a time when the two countries have been enjoying a political and economic rapprochement. Sino-Russian trade amounts to $100 billion and is envisaged to double by 2024. Russia still exports oil and gas via pipelines, but all other trade has come to a virtual standstill. Other countries are also restricting access (particularly of people) to and from China.

The global economy will feel the ramifications of the world’s second-largest economy shutting itself off. The effects go well beyond the aviation and tourism sectors. China is a pillar of globally intertwined supply chains, which means that the effect of the coronavirus will be felt in the manufacturing sector worldwide for months.

There is a big knock-on effect on the price of oil when people stop traveling and goods stop being produced and shipped. The price of Brent has plunged from $68.9 per barrel on Jan. 6 to $56.2 in early European trading on Monday. That is a huge drop, particularly in the light of Libyan production having fallen off a cliff during that time period, which would ordinarily have placed upward pressure on the price.

China is a pillar of globally intertwined supply chains, which means that the effect of the coronavirus will be felt in the manufacturing sector worldwide for months.

Cornelia Meyer

The outlook remains grim for as long as the virus is not contained and travel and trade do not resume. Depending on the source, experts expect between 10 and 40 percent fewer refinery runs in China. According to S&P Global Platts Analytics, global oil demand could drop by as many as 200,000 barrels per day (bpd) over the next two to three months. This constitutes between 15 and 20 percent of the estimated demand growth for 2020.

The coronavirus outbreak began just after the US and China concluded phase one of their trade negotiations. This was supposed to bring much-needed respite. The US-China trade war had an adverse effect on Chinese growth statistics, as well as on the oil price (before the outbreak of the coronavirus, the Chinese economy was expected to grow by 6.1 percent in 2020 — the lowest growth rate in 30 years).

OPEC is concerned about the sharp drop in the oil price. 

Saudi Arabia would have liked to bring forward a meeting of OPEC+, the group that consists of the OPEC member countries as well as their 10 non-OPEC allies. The meeting is scheduled for the beginning of March to discuss how to proceed with the 1.7 million bpd of production cuts the organization had decided on last December, and which will run through to March 31. 

Since December 2016, OPEC+ has been very successful at balancing the market, both when it got tight and when it faced a glut. The current situation certainly warrants consultations. Some analysts estimate that OPEC+ will need to cut a further 500,000 to 1 million bpd to stabilize the price. Concerns about the coronavirus will not go away for the next few weeks and its economic impact will last several months at least.


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