Coronavirus: What Does It Mean For The Global Economy?

Coronavirus represents a potent new source of uncertainty for business, but the bigger question is whether the shock will be sufficient to knock the global economy into something worse. Ian Stewart, Max Lambertson and Andrew Grimstone from Deloitte explore the possibilities.

Covid-19, more commonly known as coronavirus, has quickly emerged as a risk to the global economy. In late January, the immediate impact was a shutdown in Chinese economic activity owing to travel restrictions. This will have directly affected firms reliant on Chinese consumers or suppliers. Now as the virus spreads outside China, companies will be exposed to similar impacts from the affected regions.

Last week, the OECD lowered its forecast for 2020 global GDP growth from 2.9% to 2.4% and for the UK from 1% to 0.8%. However, this forecast assumes that viral outbreaks in countries other than China prove mild and contained. In the case of a broad global spread of the virus, the OECD expects global GDP growth to slow to 1.5%, the slowest pace since the global financial crisis.

The ultimate economic effect depends not only on the path of the virus but on its effects on movement and the response of government, local authorities and employers.

The research into the impact of such outbreaks finds that the greatest economic effects come from reductions in movement, not from illness and deaths themselves. Even if most governments do not order the blanket closure of schools like in Italy and Japan, the fear of infection will impact the behaviour of consumers, workers and employers. The effects of reductions in mobility have been seen in leisure activities, travel and tourism, and will also impact work and consumption that cannot easily be shifted online.

Firms are responding to the viral outbreak by cancelling business travel, public events and supporting employees to work remotely. The shutdown of the Chinese economy has highlighted to firms the importance of understanding their supply chains and how resilient they are to disruptions.

With the outbreak appearing to have peaked in China, companies will be watching how smoothly and quickly the country can return to business as usual. High-frequency economic data on coal consumption and car traffic suggest that activity is slowly starting to pick up, but a continuation of that slow recovery depends on containing the virus.

The path of Covid-19 outside China may not follow a smooth trajectory from peak to trough. This uncertainty means significant price volatility in equities, commodities and traded goods.

Elevated levels of external uncertainty also dampen corporate risk taking and spending. Brexit-related uncertainties have had a marked impact on corporate investment in the UK in the last three years. Increasing protectionism globally, and the associated costs and uncertainties, have also knocked manufacturing in the UK.

Coronavirus represents a potent new source of uncertainty for business. Some are likely to react by shelving expansion plans and focusing on strengthening balance sheets. Coronavirus is also likely to lower demand in some sectors, depress business confidence, reduce corporate revenues and cash flow, and cause financial conditions to tighten. Cheaper money and more liquidity from central banks will help counter these problems, but companies should act now to mitigate the impact.

Actions such as tighter cash and working capital management, reductions in discretionary spending and investment, securing of additional financial facilities and headroom are the obvious levers. Beyond that, more dramatic cost reduction measures and consideration of alternative financing options and accelerated M&A should be considered.

In the longer term, the big question is whether the shock will be sufficient to knock the global economy into something worse. Much will depend on the persistence of the virus. But the evidence from past diseases is that some of the activity that is lost is pushed back later into the year, with a trough in activity followed by a bounce. Easier fiscal and monetary policy should help with any rebound.

External shocks, such as diseases, have significant economic effects, but they tend not to change the trajectory of the economic cycle. For those companies that are more resilient and can mitigate the worst impacts of Covid-19, there will be opportunities to gain market share and to emerge stronger from the inevitable “dip” that is upon us.