Coronavirus is Threatening the Future of Globalization

The coronavirus (COVID-19) outbreak has the “potential to cause severe economic and market dislocation”, according to Neil Shearing, the chief economist of research company, Capital Economics. The outbreak has caused stock market fears that the there will be a new global recession.

‘The Impact on the Global Economy Is Likely to be More Significant Than in Previous Epidemics’

“Given the size and importance of China’s economy, the impact on the global economy is likely to be more significant than in previous epidemics (including SARS),” Shearing wrote.

According to statistics by the World Health Organisation (WHO), as of February 19, the deadly coronavirus has now infected 74,280 people and killed 2,006 in China. Since its discovery in December 2019, the virus has spread to 25 countries outside China, causing 3 deaths and 924 confirmed cases.

Last month, the WHO officially declared coronavirus the first “global health emergency” of our current globalised era.

“The [coronavirus spread] definitely injects an element of uncertainty into markets for the near term and for the longer term as well,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

‘Our Greatest Concern is the Potential for the Virus to Spread to Other Countries With Weaker Health Systems’

Airlines, for example, have dropped their prices for flights to Asia, as they struggle to fill seats, because of the fear of the virus. Qantas reported that the coronavirus outbreak has cost the Australian airline between $100 million and 150 million.

“The main reason is not because of what is happening in China, but because of what is happening in other countries,” said Tedros Adhanom, director general of the WHO, in a press conference last month.

“Our greatest concern is the potential for the virus to spread to other countries with weaker health systems, which are ill prepared to deal with it.”

Major Companies Predicting Earnings Losses Due to Coronavirus

Experts have warned that, aside from hurting China’s economy, the financial fallout from the virus could also spread economic contagion for the long term, by affecting the world’s dependence on the country’s manufacturing processes.

Technological giant, Apple Inc., has said it is not expecting to meet second-quarter financial guidance, because manufacturing has been halted or stopped in China. 15% of the company’s revenue stems from China.

Other global companies, such as Nike Inc, Walt Disney Co., Hilton Worldwide Holdings Inc., and snack company, Mondelez Inc., are also predicting a loss of earnings, because of the virus.

“I’m quite comfortable saying that there is nothing that taints really the full year at this point in time for us, pending maybe a bigger impact of the coronavirus, which quite frankly we don’t see at this point,” CFO Luca Zaramella told investors.

Stock Markets Set for a Tough Time Ahead

Goldman Sachs has also warned of imminent risk for global stocks, blaming governmental complacency on dealing with the virus.

The Chinese government shutdown the country, including its factories, to prevent contagion. This has significantly hurt the country’s economy.

Currently, China”s first-quarter growth forecast has been cut by three percent. This is a three percent drop from its fourth-quarter growth forecast last year. Investment bank, Nomura, explained that this is the largest quarterly drop in real GDP growth since the 1989 Tiananmen Square massacre.

Shearing predicts that the prolonged shutdown, which began during its Lunar New Year last month, might mean that China would never recover its lost output. Global companies like Mondelez, Apple and Nike may now have to reassess large and complex supply chains, Shearing claims.

“Maintaining supply chains eats up a lot of firms’ working capital. The economics made sense in a world of free trade and without alternative technologies.

“But a shift towards more greater trade barriers, coupled with new technologies that allow firms to reshore some aspects of production, may mean firms start to shorten supply chains.

“The risk of disruption posed by pandemics or natural disasters would add to the reasons to make this shift. That would all point to production becoming more localised or, perhaps more likely, regionalised,” he told Newsweek.

Writing in an op-ed on Capital Economics’ website, he added: “More will inevitably follow if the closures in China continue. It’s difficult to judge how the economic effects of the virus will play out over the next ten days, let alone the next ten years.

“But it’s possible that, to policy and technology, we may soon have to add the threat of global pandemics…to the list of factors threatening the future of globalisation.”

Senior analyst at investment broker EXANTE, Matthew Hinman, has warned that monetary policy makers around the world may not be able to “prevent shocks to the system that coronavirus … could cause to world growth.”