It seems extraordinary to us that the investment world took so long to recognize the threat that coronavirus (COVID-19) posed to the world economy. China, the epicenter of the virus, makes up approximately 16% of world GDP but accounts for a much higher proportion of its annual growth (around one-third).
Global supply chains are now so important (and increasingly complex) that a disruption anywhere can cause alarm, but when the disruption occurs in the world’s second largest economy and the center of production for a vast array of consumer and other goods it can cause far more than alarm. Latest data indicates that manufacturing activity in China plunged in February following wide-scale factory closures.
The virus has now been found in many countries but the disturbing feature is the rate of increase in cases outside China that began in earnest early in the third week of February. The latest countries to cause serious concern include South Korea, Italy, Japan and Iran although that list is being added to on a daily basis. Most countries in Europe have now reported infections. Virtually every day a fresh batch of airline and shipping suspensions are announced.
It will take time to analyse exactly what has occurred and to determine if the initial steps taken to contain the spread of the virus were inadequate or tardy. President Xi Jinping has rigorously defended China’s actions but censorship and obfuscation, which have blossomed under his leadership, make judgement difficult. Reading the China Daily, the English language mouthpiece of the communist party, has never been a reliable guide to the facts, despite heroic efforts by its English-language journalists to smuggle the truth out in plain sight.
The countries most exposed to loss of revenue from collapsing expenditures by inbound Chinese tourists (as a share of domestic GDP) are: Thailand, Hong Kong, Malaysia and Singapore. In terms of export exposure to China the most vulnerable are: Hong Kong, Australia, Taiwan and South Korea.
What is undeniable is that a slice will be taken off world growth in the first quarter and, inevitably, the second – and probably further ahead. Corporate profits were already struggling in many parts of the world so this is far from an ideal scenario. Is this the “Black Swan” event that stock markets fear? As “Black Swans” are, by definition, unpredictable, it cannot be ruled out – it is still early days.