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How could coronavirus impact international supply chains?

business-articlesHow could coronavirus impact international supply chains?
The world economy has been left shuddering ever since coronavirus (Covid-19) was first reported in Wuhan, China, on 31st December 2019.

China’s death toll has now exceeded 2900, with over 80,000 people infected. The rate of infection in countries like South Korea, Iran and Italy is rising and the spread of the virus is growing every day.

While central banks are promising (and taking) action in order to protect the global economy from the fallout of the crisis, many businesses are understandably concerned about the potential impact of the coronavirus on international supply chains and their own operations.
 

The impact on China: factories struggling while cities become ghost towns

In an effort to stem the spread of the coronavirus, the Chinese government has introduced city-wide lockdowns and severely restricted travel. In Hubei province, at the centre of the outbreak, roughly 58 million people have been quarantined in their homes.

This is obviously having a major impact on the country’s economy, with workers being told to work from home and thousands of factories still closed or operating at a reduced capacity.

The quarantine has also turned many of China’s usually bustling cities into virtual ghost towns, something which will undoubtedly hit consumer spending hard, with luxury brands particularly worried about the fall in demand.

Marco Gobbetti, CEO at the fashion giant Burberry, voiced his concern, saying: ‘The outbreak of the coronavirus in mainland China is having a material negative effect on luxury demand. [W]e cannot currently predict how long this situation will last.’

In its latest estimates the Organisation for Economic Cooperation and Development (OECD) forecasts that the impact of the coronavirus will lead economic growth in China to slow by 0.8% in 2020.
 

The wider repercussions and impact on global supply chains

So far there is no evidence that imported goods may be a potential source of infection for the coronavirus, so the restriction on the flow of goods between countries may prove limited.

However, the coronavirus is still set to have a major impact on global supply lines.

As much of China remains in lockdown, productivity in the country has come to a standstill. Of those factories still operating some (like those run by Foxconn) have switched over part of production to making surgical masks and other items to tackle to spread of the coronavirus.

This will have a major knock-on impact on global supply lines, with tech giant Apple being one of the first major companies to warn that these constrains are likely to hit its revenues, issuing a statement:

‘Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated. As a result, we do not expect to meet the revenue guidance we provided for the March quarter.’

Embracing globalism in recent years has backfired on businesses in this instance, as companies with an over-reliance on China are experiencing a major bottleneck in their supply lines.

Subsequently, some companies are already considering relocating production to other countries.

Elsewhere, the global tourism industry looks set to be hit particularly hard by the outbreak of the coronavirus.

This could disrupt a wide range of industries and weigh on global demand as the travel sector is estimated to account for roughly 10% of global growth.
 

Short-term shock or long-term disruption?

One of the biggest questions hanging over the coronavirus is in regards to how long the crisis could drag on for.

The current consensus appears to be that coronavirus cases will decline as it starts to get warmer (like influenza) resulting in a sharp, but ultimately short, shock to the global economy.

However, some experts believe it’s premature to assume anything about the coronavirus, particularly given that Covid-19 is so new there’s no natural immunity in the population.

As such there is a chance that the disruption caused by the coronavirus could last through the entirety of 2020 and leave a lasting scar on global growth.
 

How will the coronavirus impact the world’s economies?

In 2003 China’s SARS outbreak was estimated to have cost the global economy around $30bn.

However, China now plays a far more vital role in the global supply chain so analysts are warning of a greater impact this time around, with the real risk that it could plunge many parts of the world into a recession this year.

Philip Low, Governor at the Reserve Bank of Australia warns:

‘Today, China is a larger part of the global economy and it is more closely integrated, so the international spillovers could be larger than they were back in 2003.’

Those countries most closely linked to China’s economic performance, such as Australia, are most vulnerable to the disruption to China’s economy.

Further afield, Europe and the US are already coming under strain, with the Federal Reserve even implementing an emergency rate cut in an effort to limit the impact on the US economy.

The UK economy, meanwhile, faces the twin threat of Brexit and coronavirus uncertainty, which could prove disastrous for consumer spending.

Phil McHugh, Chief Market Analyst at Currencies Direct, comments:

‘The proliferation of coronavirus comes as the UK stares down the barrel of months of ongoing Brexit-related uncertainty. The UK faces a unique double-threat when taking into account the risks posed by ongoing Brexit-related uncertainty. The knock-on effect on the wider UK economy could be huge.’

However some countries could benefit from China’s woes as businesses look to other countries to fill in the gaps in their supply lines.

Rakesh Kumar, Director General at Export Promotion Council for Handicrafts (EPCH), recently commented: ‘This situation is a definite opportunity – buyers are thinking about an alternative supply source. That may not necessarily be India and can be markets like Vietnam, Indonesia or Malaysia as well. One has to have a first mover approach to be ahead of the curve.’

In the weeks ahead, the economic disruption caused by the coronavirus is likely to become more acute as governments step-up preventative measures in an effort to limit its spread.

Businesses will therefore need to start looking at contingency plans, focusing in particular on the potential disruption to their supply chain and whether there is enough flexibility to switch suppliers or source alternative products.

Finally, coronavirus is also triggering volatility in the currency market, which has a knock-on effect for businesses with import or export costs. Read our daily currency updates for the latest news. 
 
Currencies Direct

Currencies Direct

Currencies Direct is one of Europe's leading non-bank providers of currency exchange and international payment services. Since we were formed in 1996, we've maintained our focus on providing innovative foreign exchange and international currency transfer services to corporations of all sizes, online sellers and private individuals. We have also expanded our services to provide dynamic and pioneering "business to business" solutions to help companies, tier 2/3 banks and other non-bank financial institutions to process their international payments. Our headquarters are in the City of London (United Kingdom) and we have operations in continental Europe, Africa, Asia, and the United States. Currencies Direct is jointly owned by private equity firms Palamon Capital Partners and Corsair Capital.

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