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Our take on the economic impact of Covid 19

February, 2020

As the People's Republic of China - the global manufacturing super power – faces the Corona Virus outbreak, everyone fears the same thing – what happens to the world economies? Over the course of the last 40 years, China captured the industrial revolution and has emerged as an indispensable part of the modern world. China manufactures World's 80% Air-conditioners, 70% Mobile Phones, 60% Shoes, 74% Solar Cells, 60% Cement, 45% Ships, and 50% Steel. With a GDP of $23.25 trillion, the Chinese economy has emerged as the 2nd largest economy in the world. With exports valued at $2.2 trillion, the Chinese economy surpassed the US to become the world's number one exporter.

Discussions have also centered around whether the economic impact of Covid-19 is greater than that of SARS virus. Parallels between SARS and Covid-19 have been drawn from the onset, however the economic impact of the Corona virus is far greater than that of SARS in 2003.

The deadly novel coronavirus (n-CoV) epidemic is taking lives and has now become a global emergency. Epicentre China, especially the province of Hubei and eastern parts, are worst hit. Key industries here are coming to a grinding halt. With the weather getting warmer over the next two months, it is expected that the impact of the outbreak will subside in China by April 2020. In the worst case, the epidemic might well extend through the first quarter of fiscal 2021, intensifying the severity of impact. If not contained quickly, the epidemic will have a knock-on effect on the world economy and disrupt global supply chains. China is the world's second largest economy and a major trade partner for many countries, including India.

Financial Markets

The pandemic has rather suddenly wreaked havoc in financial markets across the world. With the US markets facing their worst week since the 2008 financial crisis, over $3 trillion has been wiped off global stock markets in the last week. The selloff has pushed markets to the brink of a correction. FTSE 100 is down more than 6% in the last week, and over 12% since 31st December 2019. S&P 500 has slumped by over 5% in the past few days, and over 8% since 31st December 2019 and safe haven assets have been rising in value as investors rush to park their funds elsewhere.

What has triggered the sudden selloff?

The sudden shift in the market sentiment can be attributed to the recent outbreak in Italy and predictions regarding China's growth. The notion that this outbreak would be a short lived one and restricted to China seems unrealistic and delusional now. Europe's check-free travel system (Schengen) has also spiked concerns regarding the spread of the virus in the continent. Essentially, markets now believe that the economic impact of Covid-19 will be much more severe than predicted.

The Trade Outcome

Sectors that are highly import dependent from China, such as ceramics and plastics, are expected to benefit Indian domestic manufacturers, with import volumes reducing. Moreover, India's steel, paper, leather and textile readymade garments (RMG) segments have a window of opportunity to expand exports, as China's own exports from these sectors account for a sizeable pie in global trade, which now stand impacted due to n-CoV.

However, sectors such as aluminium, electronics, and pharma bulk drugs in India will be unable to meet the void created by China's virus problem in global trade, as they either are running at peak utilisation or face capability issues. The fact is, other countries including India do not potentially have the scale or size to take material advantage of the opportunities available due to disruption in Chinese supplies. It could take significant resources and time to set up additional capacities, by which time China itself might re-commence production.

Consumer durables, electronics, solar panels would be most hit, as these heavily depend on imports from China, with no immediate alternatives available. Besides, some impact on exporters of products such as cotton yarn, sea food, petrochemicals, gems and jewellery is inevitable, given that China is among the biggest markets for these products.

  • Written By Dhairya Jain

Dhairya is an intern at the firm since 2019. In his own words - "A cold brew is the way to my heart". You might spot him around town, in a coffee shop with a BBC and a laptop!

  • Written By Suviti Singh

Suviti is an intern at the firm since 2020. Suviti handles the world seeing the happy face (of TSB, of course). She knows where she's going, it just might take her 2 hours longer than expected.