The coronavirus is a body blow to the Chinese economy, which will soon be felt across the globe. Our economy is more insulated from the impact of the virus, but it is not immune.
On one level, this is difficult to understand. About 75,000 mostly Chinese have been infected by the virus and more than 2,000 have died. This is wrenching for the sick and their families, but it barely registers compared with the millions that are infected and tens of thousands that die here in the U.S. each year from common influenza.
How is it that COVID-19, as it has been officially named, is doing so much economic damage?
The virus first struck at the end of last year in Wuhan, China, a region of 11 million people. While modest in size for China, that is more than the population of New York City. Many global manufacturers have operations in Wuhan, and it is a major Chinese transportation and distribution hub.
Wuhan is literally locked down as it grapples with the virus. Few are working. To get a sense of scale, consider what would happen to the U.S. economy if all of Illinois were out of commission.
Activity in much of the rest of China has been severely disrupted. Exacerbating the pandemonium is that most Chinese were away visiting family for the Lunar New Year holiday when the virus took hold and have been unable to get back home. Schools are also closed, and it will be difficult for workers to get back on the job until the schools reopen. Chinese officials will also most certainly prefer to err on the side of caution when re-opening schools and other facilities rather than risk reigniting the outbreak.
Although China appears to be slowly reopening for business, it will take weeks if not months to get back to full speed. And this assumes the virus plays out by the summer as virologists are cautiously expecting, given the trajectory the similar SARS virus took nearly 20 years ago.
While the SARS pandemic made front-page news, it had little impact on the global economy. Not so with COVID-19, whose economic fallout is already widespread. China was a bit player in the global economy when SARS hit. Today, it is an economic powerhouse. China is the second largest global economy after the U.S., accounting for one-sixth of everything produced on the planet.
Chinese business travel and tourism have all but stopped; global airlines and cruise lines are not going to China. This is a huge problem for major travel destinations, including here at home. About three million Chinese tourists come to the U.S. each year, and they are among the biggest spenders of any foreign tourists. Retailers in New York City, Miami and San Francisco are already feeling it.
Shuttered Chinese factories are also a problem for countries and companies fastened into China’s manufacturing supply chain. Apple, Nike and General Motors are some prominent examples. Shortages of some goods will likely result this spring, meaning higher prices for things we buy at Walmart and on Amazon.
U.S. exports to China will suffer, given slumping Chinese demand. China is supposed to ramp up its imports of U.S. products as part of the so-called Phase One trade deal signed by the two countries late last year. How much the Chinese would actually purchase from the U.S. was already an open question. Given COVID-19, it is even more questionable.
Because China is the biggest buyer of many of the world’s commodities, including oil, copper, soybeans and pork, and will be buying a lot less of these and many other things, prices are slumping. We will pay less at the gas pump, which is a plus, but it will be hard on the energy, mining and agricultural industries.
Global businesses already have a lot to grapple with. There is the ongoing trade war with China, Brexit, and the economic policy implications of the fast-approaching U.S. presidential election. COVID-19 is now another on their long list of concerns, making it even more likely that already cautious business executives will continue to sit on new investment and expansion plans.
Stock and bond investors have largely shrugged off the risks, so far. This may change quickly once companies begin reporting what the virus has done to their sales and profits. With stock prices trading near record highs, investors don’t appear ready for bad news from the companies they are invested in.