Coronavirus: The Black Swan and Potential Impact on Global Economy

”We’re moving closer to the day when it is China’s increasingly hefty economy, not America’s, that’s mostly to blame for a global recession.” – Ian Bremmer

With over 24,000 reported cases and over 2,120 fatalities recorded as of Feb. 20 according to the World Health Organization, the global impacts of the novel Coronavirus are going to be quite menacing. A black swan whose effects will reverberate in many sectors of world economies.

The Black Swan terminology was first coined by the Lebanese-American essayist and statistician, Nassim Nicholas Taleb. It is a rare and unpredictable phenomenon or event with the capability to deeply disrupt the global financial and economic spaces. The economic impacts of the virus become dire considering that its origin is from the factory of the world, China. 

It is imperative to brush through the most recent cases which would be the 2003 SARS epidemic. It is estimated that the Chinese economy lost about two percentage points of its real GDP growth in the second quarter of 2003 while the global economic growth lost 0.1 of GDP to SARS. But thanks to the increase in the export account and the economic stimulus packages by the Chinese government, China’s economy bounced back to record an impressive 35% in exportation in 2003.

Fast forward to 2020, the Chinese economy is the second-largest in the world today, 5 times bigger than it was in 2003, the impact of the Wuhan virus is threateningly more inauspicious. The number of tourists China sent abroad has increased by 6 folds compared to 2003 which means we might see a deeper hit to global businesses and economies than it was 17 years ago. The International Air Transport Association has warned that the virus outbreak could reduce global airline revenue by $29 billion this year. Airlines in the Asia-Pacific region are expected to bear the major brunt of the loss with a 13 percent decline in passenger predicted by the association. 

More than 19 international airlines have suspended routes that stop in major Chinese cities, especially Wuhan, the center of the disease outbreak. Asian countries will witness a sharp reduction in the number of Chinese tourists, quite important for economic growth. 

Japan, Australia, Italy, Singapore, and the U.S. have all imposed travel restrictions. This movement embargoes will take a massive toll on the global supply chain, particularly in the automobile verticals. Chinese Passenger Car Association confirmed that the sales at dealerships had plummeted 92 percent in the first half of February compared with the same time last year. The New York Times reported that nose-dive in sales in the Chinese car market will hurt the global industry. The German luxury car giant, Daimler, warned that the virus “may not only affect the development of unit sales but may cause significant adverse effects on production, the procurement market, and the supply chain.”

Furthermore, much of China is still in lockdown, getting workers back to work and getting factories working again is arduous as much as it is hazardous. It is important to note that some things are only made in China these days. A huge tranche of electronics and their supply chain verticals come out of China’s factories, a further delay in production could hit overall supply. Foxconn, a key player Apple’s supply chain and world’s largest manufacturer of electronics forecasted that its revenue will be severely affected as a result of the spread of the coronavirus. 

Analyzing the effects on countries, Hong Kong will be most affected by the virus because of its deep economic ties to mainland China in the area of merchandise, finance, and logistics. South Korea is expected to record a 0.4 percentage in the first quarter of 2020, less than the initial forecast. Main product exporters like Brazil and Australia will be affected owing to the slowing down of China. 

The coronavirus epidemic has revealed a weakness among French manufacturers which is their overdependence on China for raw materials. The French automakers are having trouble getting parts like brake pedals while the pharmaceutical industry gets 80 percent of raw materials for some drugs from China. Wuhan, the center of the outbreak is home to more than one-third of all French investment in China. The government estimated the economy may shrink by 0.1 percent in 2020. 

China is one of the biggest buyers for Africa’s resource-dependent economies. The Wuhan virus has prompted the IMF downgrade growth prediction for Nigeria. The oil price has fallen by 13 percent this year because of the reduction in Chinese demand owing to the coronavirus. Nigeria, a country that depends on crude oil to funds its foreign exchange does not export much oil to China but every $10 drop in oil prices costs Nigeria about $500m per month in lost export revenue according to John Ashbourne, an economist at Capital Economics. 

Africa’s resource-dependent economies are preparing for a hit as the virus slows down their biggest buyers, China. This has prompted the International Monetary Fund to lower the growth forecast for the Nigerian economy due to the fall in oil prices. The IMF has urged Nigeria to diversify its crude-oil dependent economy. Also, Angola which has deep ties to the Chinese market had its state-owned petroleum company, Sonangol, resell at a discount a shipment that was already on the way to China due to low demand. In Ethiopia, a UK leather and apparel producer laments how the coronavirus had affected the company’s supply chain. It imports threads and packing materials from a plant in Tianjin, China, but the factory there had not resumed operations since the Lunar year holiday.

While the Wuhan virus is known to lose its potency in warm climates which might halt the contagion, bleak expectations in the global supply chain are expected to negatively impact the US. And some EU countries, especially the German economy which is expected to majorly hit by the virus.

China’s top-down authoritarian government are to be blamed for their failure to accept how acute the virus was at the inception of the outbreaks, even to the extent of Chinese authority hiding information about the reality of the virus from other global state actors. It’s the second-biggest economy in the world and a key cog in the global supply chain. Its failure to quickly identify the public-health risks and move swiftly to mitigate will not only result in lives loss but also, China’s reliability as a trade partner will be questioned and the consequence might be the rest of the world reducing its dependence for production and growth.