As China struggles to contain the deadly new coronavirus, it’s becoming increasingly evident that the disruption to its economy will spill over to the rest of the world.
Provinces accounting for almost 69% of Chinese GDP will remain closed for more than an extra week after the annual Lunar New Year holiday, shutting factories, shops and restaurants, leaving ships trapped at port, and slamming household spending.
Travel restrictions limit the movement of more than 48 million people, with the crucial manufacturing and logistics hub of Wuhan—the epicenter of the virus—most impacted.
Hundreds of major manufacturers have had their links to the global supply chain severed. Robert Bosch GmbH, the world’s largest car-parts maker, had to shutter two factories employing a total of 800 people in Wuhan. Other auto part manufacturers, including Honda Motor Co. Ltd. and Nissan Motor Co. Ltd., have also closed their facilities in Wuhan.
And the disruption spreads from there. Key coastal exporting provinces are on an extended break and companies across the nation are taking precautions to stem the virus’s spread. China is the largest exporter of intermediate manufactured goods that can be resold between industries or used to produce other things, so its problems quickly reverberate through global supply chains. Indeed, global reliance on those products doubled to 20% from 2005 to 2015.
The Asian supply chain—which imports about 40% of its intermediate goods from China—has the biggest exposure, according to a Bloomberg Economics analysis based on the most recent detailed data released by the Organization for Economic Cooperation and Development. The U.S. imported about 10% of intermediate goods from Chinese factories.
Asian Factories Risk Supply Disruptions
Share of all imports of intermediate manufactured products coming from China in 2015
“Finding alternative supplies will be particularly hard for products in which China is a dominant supplier globally,” Bloomberg economist Maeva Cousin said.
Even in a containment scenario, China’s first-quarter GDP growth may slip to 4.5% year-on-year, according to an analysis by Bloomberg economists. That would be a drop from 6% in the final quarter 2019, and the lowest since data began in 1992.
Market Diagnosis
Year-on-year GDP
The Chinese economy now accounts for about 17% of global GDP and it’s the largest trading partner for most of its neighbors. Those most dependent stand to be hit hardest. Hong Kong’s already struggling economy faces a 1.7 percentage point downdraft in the first quarter, according to Bloomberg Economics. South Korea and Vietnam—which benefit from Chinese tourism and embedded supply chains—would see a 0.4 percentage-point drag in near-term growth. Australia and Brazil, both commodity exporters to China, both may see growth 0.3 percentage below what it would have been without the virus.
While policy makers and CEOs say it’s too soon to assess the full impact, it’s becoming increasingly clear the blow will be global. Nike Inc. has closed about half of its company-owned stores in China and expects a “material” impact from the virus. Starbucks Corp. has closed about 2,000 of its cafes and Apple Inc. says its supply chain will be affected.
Reference: Bloomberg
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