Many column inches have been filled with the unfolding story of Covid-19 since its emergence in the city of Wuhan last month. There is much speculation about what it means for China itself: its own economic and political stability, and the power of the Chinese Communist Party.
This blog focuses instead on the global political and economic implications of the outbreak, and what it tells us about the robustness (or otherwise) of global systems.
Covid-19 – what we know
As of 16 February, official Chinese statistics report the number of cases as 68,500, with 1,670 deaths. There have been almost 800 cases detected outside China. Scientific modelling suggests that these figures may be low, but there is, to date, little hard evidence to back up that analysis. A research paper in The Lancet calculates that on the evidence to date the “spread rate” is 2.68 per case, which would align it with an influenza virus, and the epidemic doubled in size every 6.4 days. But there is no global pandemic yet – although this certainly should not be ruled out as a possibility.
The virus seems considerably less lethal than SARS. But the mortality rate is currently estimated to be as high as that of the Spanish Flu of 1918/19. So it is still a major potential cause of illness and death, especially among people in poor health, and the scenes in parts of China suggest that the virus, while probably manageable in countries with well-established health systems, could be disastrous for regions with inadequate health infrastructures if the virus spreads globally. If the virus has now spread widely enough to become a global event, then rapid progress on screening, treatment, and a possible vaccine will be critical for international health agencies.
In order to try to control the outbreak, China has placed some 400 million people under some form of quarantine. But China is also keen to “get back to work”, following the traditional New Year holiday period. So there are two conflicting desires: the desire to control and minimise what remains something of an unknown quantity, the new virus; and the desire to renew economic activity across China. It may be that it is too late already to contain the virus, and that it will simply have to be managed.
To use an all-too-apt English idiom, when China sneezes, the rest of the world catches a cold.
The economic consequences of Covid-19 It is estimated that the quarantine measures imposed in China will already have the effect of a 1.5% reduction in GDP for the quarter. If the measures have to continue through into March, this would become a 2.5% contraction. Many Chinese businesses, especially SMEs, would suffer serious financial difficulties. As for China, so for the rest of the world. China now represents one sixth of the global economy. S&P (Standard & Poor) estimates that China accounts for one third of global economic growth, and is effectively the arbiter of the international economic cycle through its predominance in four channels:
Commodities;
Capital goods;
Integrated supply chains; and
Tourism To illustrate, the effects of China’s slowdown have instantly been felt elsewhere:
Taiwan’s imports fell by 17.7% in January;
In South Korea, Hyundai has had to shut down all domestic plants because of shortages of vital components from China; other conglomerates have shut down some capacity;
Nissan has reduced capacity in Japan, and other auto manufacturers are warning that they may have to do the same;
Crude oil prices fell 20% from early January levels;
One quarter of German car sales come from China, and there are tight interlinkages in supplies and components: German industrial output fell 3.5% in December (French industrial output fell 2.8%) making Europe’s industrial heartland very susceptible to a further shock;
The Region around Wuhan specialises in electronics, so the impacts are being felt in that sector, for example Foxconn, which supplies Apple, has remained largely inactive since the outbreak of the virus was first made public. One region appears (so far) to buck the trend. The USA’s S&P 500 reached an all-time peak last week. But there are experts who warn that the S&P 500 level has no rationale. The Shiller Cape Index, which measures stock prices against a 10-year rolling average of inflation-adjusted earnings indicates that the S&P 500 is in “bubble territory” – higher than it was before the Great Crash of 1929. Looking at key components of the S&P 500, it is estimated that:
30% of semiconductor earnings within S&P 500 companies come from China; as do:
3% of technology equipment earnings;
9% of consumer services;
11% of household products; and
6% of cars and car components. So just as the Covid-19 itself threatens to spread beyond China’s borders, so do the economic consequences. And just as coronavirus seems to have the gravest impact on the old and the sick, so the economic impacts are going to be felt in a global economy that is already not in the best of health. 2020 may be a very bumpy year indeed. It is also worth noting that, if the virus becomes global, it may lead to anti-Chinese sentiment in at least some parts of the world – unfair though that would be – impacting on the lives of blameless ethnic Chinese people (and no doubt others who “look Chinese”) and maybe even affecting business sentiment towards dealing with China and Chinese companies.
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