Economic Impacts of the Coronavirus
Date MArch 4, 2020
For the week of February 24, The Dow plunged more than 3,000 points and finished down 12.4%, the result of a global market reeling from the continued outbreak of COVID-19, also known as the coronavirus. After its initial outbreak in China, the virus has now spread to over 66 countries, with additional major outbreaks in South Korea, Italy, and Iran. As the severity and breadth of each new outbreak has been reported, the news has weighed on the global economy, plummeting indexes, cutting off supply chains, and limiting sales and the movement of goods across the globe. China, the source of the virus, has been hit the hardest. According to the Chinese think tank, Evergrande, retail sales in China are being stripped of $144 billion a week. Tech industries, especially mobile phone manufacturers like Apple, Samsung, and Huawei, have been hit exceptionally hard, seeing sales fall by at least 20% in the first quarter. The longer the outbreak lasts into the second quarter, the more severe the economic implications could be.
January retail sales suffered considerably in Hong Kong as a result of the outbreak, dropping 21.4% compared to a year earlier. January’s decline marked the 12th consecutive month that retail sales have declined in Hong Kong. Decreases like these are expected throughout China as tourism has been decimated because of travel bans to and from all of China. According to Coresight Research, over 11,300 outbound trips were cancelled in Shanghai between January 27 and 31, affecting some 200,000 travelers. Additionally, Coresight reports that Hong Kong saw an 85.5% drop in visitors from mainland China during the Chinese New Year from the previous year. As of the first week of February, 73 airlines had suspended or canceled flights to China indefinitely.
On the retail end, even luxury brand stores are being affected. Burberry closed 24 of its 64 stores in China, which accounts for approximately 17% of its revenue, and withdrew its financial guidance for 2020, claiming the outbreak wiped out three-quarters or more of store sales in China. Additionally, Estée Lauder Companies closed two-thirds of its stores in China and issued a warning on the substantial impact of the travel bans on full-year retail sales.
Outside of China, the global economic outlook is rapidly deteriorating as more and more countries prepare for mild to severe outbreaks. Italy saw its largest surge in reported cases on Tuesday, February 26, rising 45% in one day and making it the largest outbreak outside of Asia. Italy has begun to take precautions like China by closing schools, museums, and sporting events. With the virus will come similar retail and economic pitfalls. But fear of the virus’ reach outside of Italy and Europe has spread to the US and continues to affect the stock market. Also on February 26, the CDC warned Americans to prepare for an all but inevitable outbreak in the States, plunging the Dow 800 points just minutes after their announcement, and signs that the virus is likely to spread in the U.S. increased, with signs of a major outbreak developing in Washington State, and new cases popping up in Florida, Rhode Island, Oregon, and New York over the weekend.
The long-term retail and economic effects of the virus could be decided by the end of March where the outbreak has the potential to be declared a full blown pandemic or slowly begin to contract in its hardest hit areas. If the virus is contained internationally as China begins to recover, Chinese GDP for 2020 could drop from the previously predicted 5.6% to 3% to even 0%, and worldwide GDP could drop 0.5% to 1%. In a special report published on March 2, the Organization for Economic Cooperation and Development actually predicted negative growth for the world economy in the first quarter, while still predicting overall annual worldwide growth at 2.4% to 1.5%. This relatively moderate recession scenario will still be extremely disruptive to multiple worldwide supply chains, which could become more evident over the next few weeks. As the supply chain from China is about 30 to 45 days, supply chain issues in the U.S. are expected to become much more apparent over the next week or two.