The Coronavirus Is Making The Global Economy Sick

As the newsday ended on Wednesday (Feb. 12), the coronavirus that started in China’s Wuhan — now officially named COVID-19 — claimed its latest economic victim. The annual Mobile World Conference (MWC), scheduled in Barcelona for Feb. 24 through Feb. 27, has been officially called off by organizers, citing high-profile pullouts by Intel, Google, Sony, Vodafone, Nokia, Amazon and others over fear of encouraging the virus’ spread.

The annual event generally brings 100,000 visitors to Barcelona, and its sudden cancellation will reportedly cost the Spanish economy roughly $500 million. Officials tried valiantly to fend off the cancellation — Barcelona’s Mayor Ada Colau announced a few hours before the event was officially called off on Wednesday that she wanted to send a “message of calm,” and that the city stood ready to host the event. In addition, Spanish health officials have repeatedly confirmed that there is no need to declare a health emergency.

Deutsche Telekom CEO Tim Höttges posted on LinkedIn that while he was disappointed that the annual “class reunion” for the mobile industry isn’t happening, “to take this risk would be irresponsible.”

MWC is the latest bite that COVID-19 has taken out of the global economy, but it isn’t the first and, more likely than not, will not be the last. As of this writing, the virus has claimed about 1,100 lives worldwide, with roughly 45,000 cases. So far, the vast majority of cases are in mainland China — only 443 people have been diagnosed outside of its borders. However, as of yesterday, the CDC officially announced that Americans ought to prepare themselves for the possibility that the virus could gain “a foothold” in the U.S.

“At some point, we are likely to see community spread in the U.S. or in other countries,” said Dr. Nancy Messonnier, director of the CDC’s National Center for Immunization and Respiratory Diseases, on a conference call. She noted that for the majority of those infected, COVID-19 doesn’t produce symptoms more serious than that of the common cold, and only 15 percent to 20 percent of infected cases see the disease progress to the pneumonia that can become fatal.

Yet, however minor the effect of the virus on the human body in the majority of cases, as the sudden cancellation of MWC yesterday highlighted, its effect on the increasingly interconnected global economy is another story. Simply put, COVID-19 has effectively infected the economy, and is putting large segments of it in bed to recover.

In China

Unsurprisingly, the biggest effects are in China, particularly when it comes to consumers’ day-to-day lives. Starbucks, McDonald’s, KFC and Pizza Hut have temporarily closed stores in some Chinese locations due to the ongoing crisis. Disney has temporarily closed its Disneyland park and store in Shanghai. IKEA and UNIQLO have shut down stores across the country. Microsoft, Apple, Amazon and Facebook have advised Chinese operations to cancel all non-essential business travel.

While the virus keeps Chinese consumers homebound (as stores, schools, businesses and public gathering places like movie theaters have been closed), ordering food in and ridesharing have become increasingly challenging — as various app-based, on-demand services have temporarily shuttered operations as well.

One Bloomberg reporter said the grocery app of Alibaba Group told her that she couldn’t have items delivered, and directed her to a grocery store instead. Others have noted lengthier wait times, and outages on certain items.

Moreover, consumers seem less interested in interacting with strangers.

Many drivers for Didi, the nation’s biggest ridesharing app, have indicated that they frequently do not have work. One driver told the media that, these days, he is often stuck waiting a half an hour or longer for a request, while one per minute was the norm during the Lunar New Year. Food delivery service Meituan is still up and running, but has had to add a feature that lets couriers bring food to a set place for pickup, instead of requiring them to meet a diner and place the food in their hands. Many other delivery services have required drivers to take their temperatures twice a day, and report in on their health regularly.

Despite the trepidations and extended precautions, online ordering has spiked in China in recent weeks, as have delivery orders to homebound Chinese consumers. Zhang Hao is a driver who rides around on a moped, delivering various supplies to shut-in consumers, some of whom have made him spray himself with disinfectant before taking his packages.

“I am feeling some pressure, for sure,” he said, adding that he hasn’t seen his six-year-old daughter in months due to the coronavirus crisis, but that he couldn’t complain about his recent uptick in pay.

For many small business owners in China, the outbreak has been far from profitable. In some cases, it is bordering on ruinous — small business credit ratings haven’t been updated, and the ability to meet global orders has been significantly jammed as the global supply chain groans under the pressure.

The Global Ripple Effect

During its earnings call a few weeks ago, Apple CEO Tim Cook noted that COVID-19’s total effect on retail sales in the region remains difficult to quantify as the coronavirus continues to spread. Cook told investors that, from a production standpoint, Apple has some facilities within the Wuhan region that will be affected by a shutdown, but the company has mitigations in place to relocate that capacity. The bigger picture in the surrounding regions is uncertain, he noted.

Apple is far from the only global player caught up in a wave of uncertainty, given China’s place in the global supply chain. U.S. National Economic Council Director Larry Kudlow said, however, that it seemed unlikely that the virus would have a major impact on the U.S. economy.

“There’s a lot of variables involved, and things we don’t know. Internally, we have looked at a drop in GDP of perhaps two-tenths of 1 percent — that’s all we found so far. Again, based on the past, and based on what we’re seeing. We think it will be an absolute minimal impact,” Kudlow said, according to reports.

Of course, total aggregate effects and the impact on individual players or segments are two different things.

Amazon could be looking at some troubled waters ahead if the outbreak wears on, and could face goods shortages if Chinese workers do not get back to their manufacturing jobs soon. According to reports, more than 1 million Amazon sellers depend on Chinese workers — if China’s labor force is largely out on a sick day, that has real effects on those sellers. The ripple effect of stock-outs may eventually dent Amazon’s own fortunes, too, as revenues gleaned from serving third-party sellers translate to about 19 percent of Amazon’s top line.

Moreover, according to a new Wells Fargo report, the stock-out phenomenon could easily become common across the landscape, depending on how long the slowdown in China lasts.

“Our sources indicate that out-of-stocks at retail for replenishment product could start within 60 to 90 days if disruptions continue beyond the next few weeks, with more significant inventory issues in seasonal products, possibly by midsummer, if disruptions stretch longer,” the Wells Fargo report said.

Target and Walmart could be vulnerable to out-of-stock issues, due to their rapid replenishment infrastructure, the report noted.

Plus, there’s the hit that the global travel market will take. According to reports, the U.S. economy could see a $10 billion hit from a drop in Chinese tourism in 2020, while India is anticipating a $500 million hit from the tourism slowdown.

“We fear immediate loss of up to $500 million, as the coronavirus outbreak has hit the arrival of tourists from China, Hong Kong and neighboring countries,” said Pronab Sarkar, president of the Indian Association of Tour Operators, as quoted by Reuters.

So, is there any end in sight? According to the World Health Organization, there is no official estimate for the current outbreak to be quelled, though efforts in getting it under control are in progress. There have been some thoughts that the emergence of warmer weather will slow down the virus, because — like the cold and flu virus — cold weather conditions are better for its spread.

“I do think seasonality will play a role. As this outbreak unfolds, and we approach spring and summer, I do think we will see some tapering off of cases,” Amesh Adaljah, a physician in infectious disease and a senior scholar at the Johns Hopkins Center for Health Security, told NPR.

Spring is still weeks away, though, and it remains to be seen how much punishment the Chinese and global economies will have to take between now and then.