The human cost of the coronavirus outbreak is climbing across China and beyond. The economic cost is also mounting. That damage is, for the most part, not due to the virus itself, but due to efforts to prevent it from spreading. There are strict restrictions on moving out of Wuhan, where the outbreak began, a city with a population of 11 million. The lockdown, also now extended to other parts of Hubei province, prevents business-related travel as well as the movement of goods and workers. The impact is not confined to China. International retailers have closed operations in China. Several overseas airlines have stopped flights to China and international hotel chains have been offering refunds. And beyond that, there is growing concern about integrated international supply chains. Hyundai, of South Korea, has suspended its car production because of problems with the supply of parts from its operation in China – an early warning sign of possible extensive disruption ahead
Economic Consequences of Covid-19:
- Indirect hit to confidence (wealth effect): A classic transmission of exogenous shocks to the real economy is via financial markets (and more broadly financial conditions) — they become part of the problem. As markets fall and household wealth contracts, household savings rates move up and thus consumption must fall.
- Direct hit to consumer confidence: While financial market performance and consumer confidence correlate strongly, long-run data also shows that consumer confidence can drop even when markets are up. Covid-19 appears to be a potentially potent direct hit on confidence, keeping consumers at home, weary of discretionary spending, and perhaps pessimistic about the longer term.
- Supply-side shock: The above two channels are demand shocks, but there is additional transmission risk via supply disruption. As the virus shuts down production and disables critical components of supply chains, gaps turn into problems, production could halt, furloughs and layoffs could occur. There will be huge variability across economies and industries, but taking the U.S. economy as an example, we think it would take quite a prolonged crisis for this to feed through in a significant way. Relative to the demand impact, we see this as secondary.
- China is the world’s second-largest economy and leading trading nation, so economic fallout from coronavirus also threatens global growth.
- Economists said they expected China’s economic growth to slump to 4.5% in the first quarter of 2020, down from 6% in the previous quarter – the slowest pace since the financial crisis.
- However, the economists were optimistic China’s economy would recover quickly if the virus could be contained.
- The OECD warned of the dangers facing the global economy. In its latest Interim Economic Outlook, the organization said the virus was the “greatest danger” to the world economy since the financial crisis of more than 10 years ago.
Falling oil demand
- China is the world’s biggest oil importer. With coronavirus hitting manufacturing and travel, the International Energy Agency (IEA) has predicted the first drop in global oil demand in a decade.
- “Global oil demand has been hit hard by the novel coronavirus (COVID-19) and the widespread shutdown of China’s economy. Demand is now expected to fall by 435,000 barrels year-on-year in the first quarter of 2020, the first quarterly contraction in more than 10 years,” the IEA said in its latest monthly report.
Impact on India’s trade with China:
- With China under lockdown, India is expected to witness a major impact on imports and exports in various industries including pharmaceuticals, electronics, mobiles, and auto parts.
- China is the biggest exporter to India, followed by the US and UAE. In 2018, China exported goods worth $90.4bn to India and accounted for 14.63% of the exports.
- In 2017, telecom instruments, electronics components, computer hardware and peripherals, industrial machinery for dairy, and organic chemicals were the top five items imported by India accounting for 46% of the imports from China.
Impacts of the Indian pharmaceutical industry
- Bulk drugs and drug intermediates accounted for $1.5bn or 3% of India’s imports from China.
- According to the Trade Promotion Council of India, approximately 85% of active pharmaceutical ingredients (APIs) imported by Indian companies are from China.
- India’s overdependence on China for APIs exposes it to raw material supply disruption and price volatility. Another major hindrance to the Indian pharmaceutical industry is its low capacity utilisation, according to a report from the Ministry of Commerce and Industry (MCI). India has a capacity utilisation between 30% and 40% as against 75% of China.
Opportunities for Indian pharmaceutical manufacturers:
- Although the Wuhan coronavirus outbreak could have a significant impact on the Indian pharmaceutical industry unless it is brought under control over the next few months, it also provides an opportunity to India’s pharmaceutical manufacturers to grab share from their Chinese competitors.
- Indian pharmaceutical companies currently have two months’ stock of APIs and intermediates, quoted the Economic Times. In the absence of a major disruption due to the outbreak, the existing stocks may address the issue of shortage, it added.
- The report from MCI, however, noted that improving the overall capacity utilisation of existing manufacturing plants in India as a short-term solution to such supply disruptions. The report noted the need for assured purchase agreements from the government for the existing manufacturing plants.
- It also noted that the government should absorb the price differential to improve capacity utilisation.
Economic effects of the coronavirus on the Indian Economy:
- The impact on India is felt through supply chain disruptions from China as well as regional players, who in turn are net importers from China.
- India’s annual trade with China is ~$90 billion–India imports goods worth $75 billion and exports goods worth $15 billion.
- These include ‘electrical and telecom machinery,’ ‘organic chemicals,’ ‘nuclear reactors,’ ‘plastics’ and ‘pharmaceuticals.’ The first four of these five groups also make up India’s top imports in 2019 fiscal year.
- On account of factory closures in China, supply chains would get disrupted and this could result in shortages, especially of electronic goods and medicines.
- A key supplier of generic drugs to the global market, Indian companies procure almost 70 percent of their active pharmaceutical ingredients for their medicines from China.
- Trade deficit prints may be lower for the next couple of months. We may see the price of consumer durables inch higher. This would drive core inflation higher, which is showing signs of bottoming out.
- This, in turn, could make it more difficult for the MPC to provide further monetary policy stimulus. January’s core inflation print came in at 4.2 percent compared to December’s 3.8 percent.
- Fall in global crude prices on account of an anticipated slowdown in demand would also result in a lower import bill. The sectors that are likely to be impacted on the export front are diamonds, leather and petrochemicals
- Imports are likely to contract more than exports and therefore, from a current account perspective, the outbreak could actually be rupee-supportive.
- Offshore fundraising by Indian corporates is also likely to slow down, as raising money onshore has become cheaper after the LTRO announcement by the RBI
- The retail mobile trade, for instance, is almost entirely dependent upon China. While every month, old models of mobile phones would see a drop in prices as new models are supplied, in the current month, no such drop in prices has taken place and the supply of goods is being rationed by companies
- The toy market sees nearly 80% of its demand met by products made in China, while only 20% is met by Indian manufacturers
- Many items, like belt buckles, Christmas lights, specific parts of gas stoves, are only made in China. The prices of most of these goods had already seen an upward correction, and in some cases it is as much as 50%
- The travel and tourism sector will be affected badly. Several overseas airlines have stopped flights to China and international hotel chains have also been offering refunds. Most of the Chinese citizens are avid travellers, hence the tourism in other countries might feel the ripple effect.