Coronavirus Impact on Markets: China Could Recover Faster Than Expected. What About Big Western Economies?

America has five seasons – spring, summer, fall, winter — and flu. The last of these, lasts from October to February. In this flu season, the dominant strain was a particularly nasty virus called H3N2. It infected 32 million Americans, which is about 10 percent of US population. 310,000 people got so ill that they had to be hospitalised. And, 18,000 died.What is shocking about this number is not that an ordinary virus could kill so many people in the world’s ‘most advanced country’, but that this was actually a kinder flu season. In 2017-18, 45 million Americans caught the flu, 21 million had to visit their doctors, 810,000 people were hospitalised and about 80,000 people died.Coronavirus FAQs: What You Really Need to Know About COVID-19The world economy, that doesn’t take a moment’s pause — even during flu season — has hit the emergency brakes over the Coronavirus.One big reason for that is people don’t react well to uncertainty.There’s been a chain reaction on businesses that depend on factories in China.The worst hit are companies that source high-tech parts, semiconductors, and consumer electronic goods from China.The world has faith in China’s ability to manage its crises. It has done it twice in the past — after the global recession of 2008 and its own stock-market crash of 2015.Why the World Economy Has Hit Emergency BrakesCompare this to the numbers for the Novel Coronavirus or COVID-19. In China, its home country, less than 81,000 people were infected, and just over 3,100 people died. Where seasonal flu infects 10-15 percent of Americans every year, COVID-19 infected 0.006 percent of China’s population. The global infection rate is even smaller. In the 115 countries and territories, where the Coronavirus has been found, just 0.0015 percent of people have been infected.Yet, the world economy, that doesn’t take a moment’s pause — even during flu season — has hit the emergency brakes over the Coronavirus.One big reason for that is people don’t react well to uncertainty. Right now, scientists still don’t really know how COVID-19 works, how it spreads, and how long it will last. Seasonal flu, on the other hand, might be a bigger killer, but it is part of public consciousness by now. Much like road accidents or violent crime, which are real dangers, but don’t stop people from going about their daily life.Is Coronavirus-Related Anxiety Getting to You? Seven Ways to CopeHow Coronavirus Has Infected the ‘Factory of the World’The big economic reason is that the Coronavirus has infected the factory of the world. China’s massive manufacturing machine produces 28 percent of all factory-made goods sold globally. Chances are that almost everything you and I buy is either made in China or has components that were produced there.And, it is true, that in the first two months of this year, China’s exports dropped by 17 percent, way more than what analysts had expected. Shops across the world are beginning to run out of stocks of every day items that consumers buy.There’s also been a chain reaction on businesses that depend on factories in China. Products and inputs that would normally be part of a regular supply pipeline are either stuck or not being produced in the quarantined regions.A recent article in Harvard Business Review gives us a sense of what is happening. The world’s top 1000 companies have over 10,000 facilities — factories, warehouses and other operations — in the quarantined regions of China. The worst hit are companies that source high-tech parts, semiconductors, and consumer electronic goods from China. Capital goods manufacturers — automotive, industrial and heavy machinery — are also facing massive supply disruptions.Dhinchak Pooja Drops New Track ‘Hoga Na Corona’ to Fight COVID-19China Is Both the World’s Biggest Producer & ConsumerHundreds of construction projects across the world have got stalled because inputs are not coming from China. That means hundreds of thousands of people are losing their jobs. Hong Kong alone has laid off over 50,000 construction workers, and another 80,000 are getting work for just one or two days a week because of supply disruptions from mainland China.China is not only the world’s biggest producer, it is also the world’s biggest consumer. It guzzles 14 percent of global oil supplies. China also consumes 56 percent of the world’s cement, 53 percent of global steel and about half of the world’s coal output. A part of this is used to produce millions of consumer goods for China’s 1.4 billion people. In 2018, Chinese families bought 80 million refrigerators, 200 million air-conditioners, 72 million washing machines and 110 million microwave ovens.The bigger chunk of the cement, steel, coal and crude oil that China consumes goes into its mega construction projects — skyscrapers, malls, factories, highways, railroads, bridges and airports — each competing to be bigger, higher and better. In 2018-19 alone, China accounted for nearly 20 percent of all construction investment globally.Crude Oil & Coronavirus Stir Economic Unrest Around The World China’s Crisis Management AbilitiesTo get a sense of how much China builds, here is a staggering bit of data Bill Gates presented in a blog written in July 2014: in the three years between 2011-13, Gates wrote, China used more concrete than the USA did in the entire 20th century. That pace might have slowed down since 2017-18, but it still way higher than the rest of the world.So, when China catches the flu, the rest of the world is bound to sneeze.Yet, the world has faith in China’s ability to manage its crises. It has done it twice in the past — after the global recession of 2008 and its own stock-market crash of 2015. Analysts at Nomura have come up with two indices to track how fast China is able to resume businesses. One of these tracks businesses that have been most affected by the Coronavirus outbreak, which make up about 65 percent of China’s GDP. This ‘narrow’ index shows that, as of early March, Chinese businesses have returned to only 47 percent of their capacity, and the pace of resumption is much slower than expected.Another measure, China’s official Purchase Managers Index (PMI), which gives a fair indication of activity in the manufacturing sector, has fallen off the cliff in February. It fell from 50 in January to 35.7 in February, the lowest it has been since the 2008 global recession. For the services sector, the PMI fell even lower, down to 29.6 from above 50. Anything lower than 50, indicates a contraction in economic activity, and this is as sharp a contraction as one can get.China May Recover Soon, But What About Big Western Economies?The two-month long lockdown also means that China has stopped buying things. Crude oil consumption went down by 3 million barrels a day, which is 3 percent of global production. Steel demand went down by more than half last month. Car sales dropped by 25-30 percent. Coal consumption in February was down by about a third. Construction projects have stopped all across the country, drastically bringing down the consumption of hundreds of raw materials.The good news is that, the Chinese government has asked all local administrators to remove roadblocks and focus on resuming economic activity immediately. Despite problems in coordination, various local governments are now working in tandem to ensure supplies move quickly from one part to another.China’s ability to centrally plan production has enabled it to meet shortages with remarkable speed. Take the case of face masks, which are running short across the world. In the middle of January, China was producing about 10 million face masks every day. Within two weeks, it doubled production, but it was still way below the estimated 100 million masks that it needed.So, Chinese Premier Li Keqiang personally began to visit mask factories to oversee production. As of early March, China’s daily production of face masks has crossed 116 million units. That’s nearly 12 times the capacity it had before COVID-19 hit the country.China might revive faster than the world expects it to. The question is, whether the big economies of the West will be able to move as quickly. The United States, which has an economy that is 50 percent larger than China’s, is already gearing up for big disruptions. Many key industries depend on supplies from China, and these will face production cutbacks.Is the Panic on Wall Street Justified?Supermarkets are already facing shortages, which has been made worse by panic-stricken buyers stockpiling on everyday items. Travel services will be badly hit, as will restaurants, hotels and movie theatres, as people practice ‘social distancing’. That means, a big chunk of American workers will be out of work for a few weeks.So, is the panic on Wall Street justified?The Coronavirus has essentially caused supply shocks, most of it because of China, and partly South Korea. In both these countries, the spread of COVID-19 seems to be slowing down. The virus itself doesn’t appear to affect people of working age that badly — the death rate for people between 20-59 is just 0.65 percent. That means workers will be able to return to factories as soon as they are reopened.The real reason to worry about the Novel Coronavirus was that it was going to shut down China. Analysts anticipated that the virus would spread across China in a second wave, beyond Wuhan. That fear appears to have been unfounded. It is clear that the global economy will have a quarter of a slowdown, or even contraction, but the recovery is likely to be as sharp. So, those who are going against the trend and buying into the dip, might have the last laugh.(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)

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