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Economic impact of Coronavirus

Corona Virus

Oxford Economics warned that the spread of Coronavirus to regions outside Asia could cost the global economy 1.3% off global growth in 2020, the equivalent of $1.1 tn in lost income. 

About Coronovirus CoVID-19

Coronavirus (CoV): CoV also known as CoVID-19 are a large family of viruses that cause illness ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS-CoV) and Severe Acute Respiratory Syndrome (SARS-CoV). A novel Coronavirus (nCoV) is a new strain that has not been previously identified in humans.

Means of transfer: Coronaviruses are zoonotic, meaning they are transmitted between animals and people. Several known Coronaviruses are circulating in animals that have not yet infected humans.

Originated in China: On 31 December 2019, the WHO China Country Office was informed of cases of pneumonia of unknown aetiology (unknown cause) detected in Wuhan City, Hubei Province of China. A novel Coronavirus (2019-nCoV) was identified as the causative virus by Chinese authorities on 7 January.

Symptoms: Common signs of infection include respiratory symptoms, fever, cough, and shortness of breath and breathing difficulties. In more severe cases, the infection can cause pneumonia, severe acute respiratory syndrome, kidney failure, and even death.

Health impact: As of 22nd February 2020, 77,816 cases of Coronavirus have been registered around the world. It has resulted in 2,360 deaths. Currently, COVID-19 is affecting 32 countries and territories around the world and 1 international conveyance (the “Diamond Princess” cruise ship harboured in Yokohama, Japan).

COVID-19 has already reached Europe, the USA, and the Middle East. Africa does not yet have any confirmed cases. Coronavirus has reached India and infected patients were reported from Italy, China etc.

Economic consequences: The disease has now turned into a pandemic and as it spreads to different countries, economic damages around the world are mounting. The maximum impact will be on China, but other countries are not immune to the effects because most economies are now globally integrated. The outbreak has the potential to cause severe economic and market dislocation.

The economic impact of Coronavirus

Chinese economy: China has become an indispensable part of the global business. Due to the spread of Coronavirus, various economic activities in China have taken a hit. Businesses are dealing with lost revenue and disrupted supply chains due to China’s factory shutdowns. Travel to and from China has also been restricted. According to a Reuter’s poll of economists, China’s economic growth expected to slow to 4.5% in the first quarter of 2020– the slowest pace since the financial crisis.

Countries most hit: Based on the value of its exports to mainland China and Hong Kong relative to GDP, Taiwan is likely to be the hardest hit, followed by Vietnam, Malaysia, and South Korea.

Trade and commerce: Chinese economy accounts for 16% of global output. China has grown into the world’s factory, churning out products such as iPhone, cars, luxury products and driving demand for commodities like oil and copper. Factory shutdowns are causing a shortage of products and parts from China, affecting companies around the world, including Apple and Nissan.

Unavailability of workers: Factories delayed opening after the Lunar New Year as workers stayed home to help reduce the spread of the virus. Electronics, consumer goods, chemicals, auto components and pharmaceuticals are seen as the most vulnerable sectors.

Pharmaceuticals: Prices of some bulk drugs have already risen.

Global supply chains: There is a threat to global supply chains (GVCs). Qualcomm (QCOM), the world’s biggest maker of smartphone chips, warned of uncertainty around demand for smart-phones, and supplies needed to produce them. Auto parts shortages have forced Hyundai (HYMTF) to close plants in South Korea and caused Fiat Chrysler (FCAU) to make contingency plans for plants in Europe.

Automobile sector: Car plants across China have been ordered to remain closed, preventing global automakers Volkswagen, Toyota (TM), Daimler (DDAIF), General Motors (GM), Renault (RNLSY), Honda (HMC) and Hyundai (HYMTF) from resuming operations in world’s largest car market.

Oil industry: The petrochemical sector serves as the backbone for various other manufacturing and non-manufacturing sectors such as infrastructure, automobile, textiles and consumer durables. China is the world’s biggest oil importer. With Coronavirus hitting manufacturing and travel, the International Energy Agency (IEA) has predicted the first drop in global oil demand in a decade, causing a drop in oil prices. The oil market is currently facing a situation called ‘contango’,wherein spot prices are lower than futures contracts. Industries are realigning their strategy amid energy demand forecasts.

Crude-dependent sectors:Sectors such as aviation, shipping, road and rail transportation are likely to gain from a sudden drop in crude oil prices.

Benefit to oil-importing nations:Major oil importers such as India will get a better bargain with reduced oil prices.

Case of India:India is the world’s third-largest oil importer and fourth-largest buyer of liquefied natural gas (LNG). New oil dynamics can help India contain its current account deficit; maintain a stable exchange regime; and consequently inflation. This could be a good time for Indian airlines to make up for losses.

Travel industry: Chinese tourist numbers are now falling sharply as China bars its citizens from group tours abroad, and many countries refuse or restrict the entry of Chinese. Many trade shows and sporting events in China and across Asia have been cancelled or postponed.

Popular Chinese destination to lose: Judging by the size of Chinese visitors’ expenditures relative to GDP, popular destinations such as Thailand, Vietnam, and Singapore will take the hardest hit. Japan will also be adversely affected especially with Summer Olympic Games being scheduled to start in Tokyo on July 24.

Case of India: India recently announced the temporary suspension of the e-visa facility for Chinese travellers and foreigners residing in China. Since air travel between India and China had grown significantly owing to increased business activities, business travel segment will take a hit.

Financial sector: As infections increase, especially in Asian financial hubs such as Hong Kong and Singapore, financial deals could be disrupted. It can disrupt economic activities due to supply-side constraints, which will result in market volatility.

Gold prices: Due to fear and uncertainty in markets about the scale and impact of the virus outbreak, gold prices have risen as the commodity is considered a haven. 

India’s Trade: India imports a bulk of its raw materials from China. Scarcity of some raw materials will lead to higher prices.India must leverage the lower oil prices and increase its exports amidst a shortage of Chinese exports to the world market.

Rupee value: Exchange rate (rupee against the dollar) is rising, which is also leading to higher costs.

Economic measures initiated:

China: People’s Bank of China cut a key interest rate and injected huge amounts of cash into markets to help take the pressure off banks and borrowers. New tax breaks and subsidies have been announced to help consumers. Central banks in neighbouring countries including Sri Lanka, Malaysia, Thailand and the Philippines have cut interest rates

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