Evidence of creaking global supply chains is fast emerging. China home sales have tumbled. JCB, manufacturers of the eponymous digger, are shuttering production because of a lack of parts from China. Large swathes of Chinese industry never reopened after the lunar New Year holiday because migrant workers stayed in the home villages. Chinese shoppers, the mainstay of shopping villages like Bicester, are said to be conspicuous by their absence.
There is less talk about end of the world epidemic scenarios, and the story is now being pushed off the front pages. Yet it’s scary just how little we yet know for sure about the virus in terms of just how infectious, dangerous and mutable it might be. The only thing we know for absolute sure - it’s going to have massive real economic consequences – which means it’s a genuine Black Swan, rather than some nebulous “Grey” event some pundits have been talking about.
The economic damage will be massive. It will cause financial pain, impact financial asset prices, and will trigger central bank reaction. Get ready.
We still don’t know what the human cost will be. There was a story on Bloomberg: Coronavirus Could Infect Two-Thirds of Globe, Research Shows. That raises massive issues about its potential impact and mortality rate. It will be big issues like quarantine, and the little stuff, like how long before everyone has a hand sanitiser on their desk? Scary comment from WHO: “Isolating cases and quarantining contacts is not going to stop this virus.”
Michael Every of Rabobank
There is a grim familiarity this morning in the news that the number of Chinese coronavirus cases has continued to rise. The number of cases in the country is now above 70,000 with the death toll standing at 1,770. Despite the headlines, the country’s stock market took encouragement from another round of stimulus. The PBoC cut interest rates for 1 year loans in an effort to support the baking sector while the Finance Minister promised that Beijing would roll out targeted tax and fee cuts.
The economic impact of the stimulus, however, will struggle in the face of the measures needed to contain the spread of the virus. According to Reuters, restrictions in the Hubei province were tightened further yesterday with most vehicles banned from the roads and companies ordered to stay shut until further notice. Headlines this morning also suggest that the Chinese government is considering delaying its high profile annual meeting of its full parliament in an effort to contain the virus. Around 3,000 members of the National People’s Congress have been expected to meet in Beijing from March 5 for around two weeks of meetings attended by President Xi and other top officials.
As the impact of the economic slowdown spreads out from China, both Singapore and Thailand cut their growth outlook.
In Japan, criticism over PM Abe’s handling of the crisis resulted in a hit to his popularity in three separate opinion polls. It appears that the broad population may favour a blanket ban on arrivals from China rather than the softer policy currently adopted by the government.
That said, the cost of the coronavirus on tourism in Japan is already marked. Japanese press report that regional economies have seen the number of visitors from China and Southeast Asia plummet.
This is in line with UN estimates that Japan could lose USD1.29 bln in tourism revenue due to international flight restrictions related to the coronavirus outbreak. This won’t help fears that the country is in danger of falling into recession in the current quarter. Japanese GDP shrank at an annualised 6.3% q/q in the final three months of last year following the October increase in the sales tax. This was the biggest contraction in the economy since the last time the tax was hiked in Q2 2014.
Speculation that PM Abe may have to consider another round of spending, just two months or so after the last round of stimulus, will inevitably grow.
On Friday, reports circulated that the US government may already be considering further stimulus. One of the measures in a forthcoming package may be an incentive for US household to invest in stocks. Ahead of the November election President Trump is seeking to distinguish himself from Democrat rivals whom he has accused of following ‘socialist’ policies. Several market strategists,, however, are also stressing the risks that such a policy could stoke a stock market bubble.
The global supply chain Armageddon is happening. The economies of the world are more interconnected than ever. There are many 'single points of failure' in these complex and global operations, of which many of them originate in China.
A new poll via Shanghai's American Chamber of Commerce (AmCham) discovered that 50% of US firms operating in China say shutdowns of factories have impacted their global operations due to the Covid-19 outbreak, reported Reuters.
About 78% of these firms warn that their staffing is currently short at the moment, which would prevent the resumption of full production, leading to massive shortages of products in the next several months for Western markets.
Many of these companies, about 109 in total, have operations in Shanghai, Suzhou, Nanjing, and across the Yangtze River Delta, are regions currently experiencing mass quarantine of citizens, industrial hubs shuttered, and transportation networks halted.
"The biggest problem is the lack of workers as they are subjected to travel restrictions and quarantines, the number one and number two problems identified in the survey. Anyone coming from outside the immediate area undergoes a 14-day quarantine," said AmCham President Ker Gibbs.
"Therefore, most factories have a severe shortage of workers, even after they are allowed to open. This is going to have a severe impact on global supply chains that are only beginning to show up.
As we noted earlier this month, many companies were slated for last Monday to resume production, with full production expected by the end of this month. However, that's likely not going to happen, throwing much of the world's complex supply chains into chaos.
The economic impact of shutting down major industrial hubs in China with more than 400 million people in quarantine, some reports actually indicate the total could be 700 million, is generating a massive shock that could tilt the global economy into recession. These disruptions will cause world trade growth to plunge. Already, recession bells are ringing in Japan and Singapore, as it appears, these two countries are on the brink of disaster.
It has also been reported that supply chain woes are expanding outwards from China, moving from East to West.
Last month, several car factory plants in South Korea were crippled because they could no longer source parts from China.
Several days ago, it was reported that a Fiat Chrysler Automobiles plant in Serbia was halted because it ran out of parts sourced from China.
It was also reported that General Motors could halt some operations in the US because it soon might not be able to receive parts from China.
As we noted on Sunday night, the world is witnessing the "ugly end of globalization." Trade war and virus impacts on global supply chains have sent de-globalization into hyperdrive and could trigger the next worldwide recession.
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