Feb 11, 2020
The Chinese Economy is Taking More Than A Sick Day
The outbreak of coronavirus could cause an economic slowdown for China and the world.
When China coughs, it seems like the whole world catches a cold.
Markets around the world have fallen in reaction to a mysterious new coronavirus that has reportedly infected more than 40,000 people in China, killing more than 900 people, and grinding normal activity to a halt in the world’s second-largest economy
As infections have spread to other countries and regions, including Japan, South Korea, the U.S., and Western Europe, the World Health Organization (WHO) declared the outbreak a global emergency on January 30, 2020. But the epidemic is more than just a health problem.
Some experts suggest that the outbreak could cost China more than $60 billion, further slowing the country’s already-weakened economy. And China’s economic problems could also spill over to the rest of the world as travel to and from the country is restricted, and manufacturers look for different outlets for their goods, and for components to manufacture their products.
How is the Outbreak Affecting the Global Economy?
China’s economy, the second-largest in the world, is vital to global markets. One-third of world economic growth is attributed to China, and companies around the world depend on China for production and manufacturing of goods.
Apple, for example, announced that it would look for new suppliers of parts while China deals with the outbreak. Car manufacturer Tesla also temporarily closed its factory in China. Meanwhile, coffee chain Starbucks and Scandinavian furniture design store Ikea both temporarily closed more than half of their Chinese stores, according to the New York Times.
The timing of the outbreak comes only days after China and the United States concluded the first part of a trade deal, on January 15, 2020, which committed China to purchasing $200 billion worth of American products over the next two years.
The trade war caused two years of tension between China and the United States, as the two took turns raising tariffs on each other’s exports. China’s GDP grew at 6.1% in 2019, the lowest rate of growth for China’s economy in roughly 30 years, according to the Wall Street Journal.
More about the virus
The virus outbreak has been traced to the city of Wuhan, home to 11 million people and one of China’s big economic centers. Wuhan produces $213 billion of goods and is responsible for 1.6% of China’s GDP, according to reports.
The lockdown on travel in Wuhan could slow down production in the city, which is crucial for transportation, manufacturing, and shipping logistics in China. In fact, Wuhan is the largest city for water, land, and air transportation in inland China, according to reports. The rail system in Wuhan, which is currently shut down, connects passengers to major cities including Beijing, Hong Kong, and Shanghai.
The outbreak is also happening during the Lunar New Year, a major holiday for travel in China. More than 3 billion people were expected to travel throughout China for holiday celebrations, which started on January 25th. China’s government extended the Lunar New Year three extra days through February 2nd in response to the outbreak, which is expected to slow manufacturing as people stay home from work.
From 2002 to 2003, China dealt with an outbreak of different strain of coronavirus that caused Severe Acute Respiratory Syndrome (SARS). SARS killed approximately 800 people, according to the New York Times.
The economic impact of the current epidemic is expected to be larger than SARS, which cost the global economy $54 billion, according to reports.
The new strain appears to be spreading more quickly than past epidemics. It took five months for the number of cases of SARS to reach more than 5,000 people. This new strain first showed up in patients in December, 2019, and spread to more than 5,000 people in a month, according to CNBC.
Investing during times of volatility
Outbreaks like the one in China can lead to uncertainty and volatility in the stock market.