Can the Coronavirus cause a recession?

Everyone is tracking how the coronavirus is spreading widely beyond its origins in China. This seems to be leading to economic damage across the world. What’s happening? Can Coronavirus cause a recession?

Can the Caronavirus cause a recession?

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Earlier the virus was restricted to China and Hong Kong. Now it has spread to the US and Europe. Washington state has reported more deaths from the coronavirus. There are now more than 100 confirmed cases in the U.S. There are over 92,300 confirmed coronavirus cases worldwide, with more cases popping up outside China than inside. Deaths worldwide exceed those from the SARS virus.

The global outbreak has caused mayhem in the stock markets and disrupted supply chains around the globe. The US Federal Reserve recently took aggressive steps to try to contain the damage it is causing by slashing interest rates by half a percentage point.

Even though there have been few signs of widespread economic damage, there is a possibility of damage if the virus keeps spreading. It could cause a recession across the world. But for that to happen, the effects will have to spread beyond manufacturing, travel and other sectors directly affected by the virus. The real sign of trouble will be when businesses with no direct connection to the virus start reporting a slump in their business. First, let us look at how it has impacted the stock markets.

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Coronavirus and the stock markets

When there were reports that the coronavirus was spreading across Asia, into Europe and threatening the US, the stock markets across the world started falling sharply. By the start of March, all the major stock markets had dropped by up to 15% from their recent peaks. When there was a global financial crisis in 2008, cross-border flows of people, goods and money slowed. The coronavirus is generating such an effect.

Also read: What is yield curve inversion? How does it impact markets

Coronavirus and the world economy

The outbreak has led to the closing of factories, flights are being canceled and events are not being organized. Many cities across Asia and Europe are almost shut down. Several companies including Apple, Master card, United Airlines and others have announced that the virus might hurt their profits.

The Organization for Economic Cooperation and Development has said that if the virus continues to spread, global economic growth could be cut in half to 1.5 percent in 2020. This will lead to a dip in the gross domestic products (GDP) of most countries in the world.

You might say that a recession is more than a fall in the GDP. For actual recession, jobs need to be cut which will lead to lesser consumer spending and lesser economic production leading to recession. Will, the coronavirus do this?

It can cause these effects. How? Think about natural disasters such as hurricanes or earthquakes. A bad natural disaster can easily lead to declines in economic output as stores close, shipments are delayed and people don’t venture out and stay in their homes. A really bad natural disaster across the country might even cause a dip in the GDP. Coronavirus is much like a natural disaster.

As the fear of the virus spreads, people will stop going out to eating joints, movies, and other public places. Airlines will cancel domestic and international flights. Sports organizations will scrap games. As consumer spending declines, the businesses will have less revenue. With less revenue and no certainty on when the business will resume, companies might start laying off employees. People and businesses will stop spending further. That will hurt demand for a range of products, forcing more people to be unemployed and pushing companies into bankruptcy.

Another point is that supply-chain disruptions can lead to manufacturers not getting the raw materials on time and because of this, retailers may not receive products on the shelves. With nothing to sell, they will lay off workers. This will set off the cycle of job losses and reduced spending.

Once the direct effects of the virus spread across the world, the ripples will reach much further into different countries. If that happens, every economy might slow down even after the outbreak is controlled.

Also read: 13 Reasons for Indian Rupee Depreciation Against US Dollars

Is it already happening?

Apple, one of the best companies in the world, has revised its projections for this quarter. Nike, too, is expected to announce a cut in profits. These are two companies that manufacture a significant amount of their products in China. They also sell a significant number of products to China. That is why they are revising their revenues and profits.

Apple has closed its stores and corporate headquarters in China. Starbucks too shut down more than 2,000 stores in China about half of its total stores. Many factories have closed in China. Even if some factories are working in unaffected areas of the country, travel restrictions have made it difficult for people to get to work. So, manufacturing in China has slowed down.

Even if people came back to the factory, they need to spend 14 days in quarantine. Not only this, the government-mandated lock downs in China have kept people off the streets. So, consumer spending has dropped.

Luxury fashion brands that depend heavily on Chinese buyers have taken a hit. The investment management firm Bernstein has said that the coronavirus could end up costing the luxury market $43 billion in sales in 2020.

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Big names and even smaller businesses are also getting affected by the coronavirus. For instance, sellers on Amazon who source cheap products from China are facing problems with dwindling stock to sell. So, all businesses that rely on China for their supply chains or have big retail presence within the country face similar challenges.

Then, there are the airlines. It is said that airlines could lose as much as $100 billion due to coronavirus. All the other businesses that rely on tourism such as hotels, cruises, tour companies, and more will also get lesser revenue. Chinese tourists are some of the world’s biggest spenders and travel restrictions are leading to a slow down in the tourism industry.

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How does this affect India?

Do you know about 14% of the Indian imports at risk due to the outbreak in China? How is that? According to the Center for Monitoring Indian Economy (CIME), China has been the largest source of imports for the Indian market for the past decade and 14% of India’s total imports are from China. So, any major disruptions in China will cast a gloom on the supply chains, manufacturing, and supply of the consumer goods market in India.

Another point is that China is an export market for India. CIME data shows that after the US and the United Arab Emirates, China is the largest export market for India. The raw materials export industry in India will have lower revenues if China doesn’t recover from the coronavirus disruption.

However, there is a positive side to the virus outbreak. The soft commodities market in India will have a better business. Global buyers are now exploring the Indian market for products such as fashion, ceramics, home ware, and furniture. So, Indian manufacturers and exporters have received an increasing number of inquiries from the US and Europe. They could replace China as a supplier while the Chinese market is down. Even the textile market is receiving good revenues.

What’s the conclusion? Everyone wants to know if the virus can cause a global recession. The answer is that it could. Whether it will happen depends on when the spread of the virus is resolved. The question is how long does this virus outbreak go on? If the coronavirus isn’t contained, the likelihood of a global recession increases. However, no virus has ever caused a recession till now. So, we need to wait and watch to see whether this virus gets resolved.

About the author

KishorKumar Balpalli, believes that financial literacy and discipline is the key to one’s financial freedom. KishorKumar is a Certified Financial Planner, Personal Finance Blogger & the Founder of myMoneySage.in an award-winning Wealth Management platform. myMoneySage simplifies investing for individuals and amplifies business growth for Registered Investment Advisers by leveraging Artificial intelligence and machine learning. The AI of the machine plus the intellect of the human advisor enables comprehensive & client-centric advice at a fraction of the cost of a conventional adviser.

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