The Economic Risk – Coronavirus Outbreak

Should we panic about coronavirus? At the time of writing the world health authorities have acknowledged around 3000 deaths, with nearly 100,000 others infected and this number is likely to increase until a vaccine is found.

The COVID-19 death toll has already outstripped that of SARS, which broke out in Southern China in 2003 and Italy is currently reporting the largest outbreak in Europe which makes the threat feel much closer to home. 

In addition to the human suffering this outbreak is seriously impacting global markets and business. At the epicentre, China is the globes second biggest economic region and represents around a third of global growth with factories on the eastern seaboard crucial to global supply chains. In 2019, China’s economy grew by around 6.1 percent, its slowest rate for almost three decades and during the first quarter of this year, economic growth is looking likely to fall to around 4.5 percent according to Reuters. ^[1]

As the world’s second-largest economy struggles, so do manufacturers dependent on Chinese-made parts. The global supply-chain knock-on has been severe with Apple warning investors that global iPhone supplies would be limited as manufacturing in China cannot meet demands. ^[2] Jaguar Land Rover, the UK’s biggest carmaker has warned unless “the Chinese supply chain comes on stream again” they may have to put a stop on production within two weeks and JCB has already cut production at 11 UK plants due to a back log of parts being shipped.

Manufacturing isn’t the only industry to face uncertainty, as one partner of Western Union who is focused on entertainment said “the virus represents a real threat to the music industry as the threat of lock downs for mass gatherings puts festival and tours at risk and therefore we are seeing insurance premiums increased to levels which may make the events unfeasible”. Italy alone has taken it upon themselves to hold closed football matches to prevent the virus from spreading, therefore losing out on ticket and hospitality sales. In addition to the music industry, global tourism looks to take a huge impact. The Chinese Ministry of Transport said that 73 percent fewer trips were taken by Chinese tourist over the lunar new year holiday in 2020 compared to 2019. With Chinese tourism accounting for over 150m of overseas trips in 2019, this could cause a large financial impact to the travel market. From hotels to airlines to museums and local boutiques, the impact the tourism industry could feel is substantial.

The economic impact of the virus is spooking financial markets and participants will continue to monitor developments, but the disruption to supply chains from Asia are already being felt and recession risks in Italy and Germany are increasing. However, we have yet to see the main impact of this as we are still currently receiving shipments from over four weeks ago. Due to this, the European survey data remained positive last week. Nevertheless, the realised economic fallout may take a few months to emerge. That is not to say that the outlooks are not starting to waiver. For example, Oxford Economics has made a cut to its forecast for global growth this year from 2.5% to 2.3%, which would be the lowest since the 2008 financial crash. ^[3] Elsewhere in financial markets, oil depreciated circa 4%, dragging commodity-linked currencies lower too.

“The overall global economic impact is set to be significant. Since the outbreak in January, risk sentiment has been flip-flopping as investors weigh up the potential economic fallout of the virus. Most stock indexes are lower, oil prices and commodity-linked currencies are weaker, whilst safe-haven Gold and the Japanese Yen are in high demand. But despite mounting circumstantial evidence of widespread supply-chain disruption, it may take until the second quarter of the year to witness the actual impact on economic activity, particularly in the manufacturing sector at a regional and global level.” according to George Vessey Currency Strategist at WUBS.

For any businesses, uncertainty is bad news, but especially if you are involved with importing, exporting or any other activity that needs transactions to be made in foreign currencies. Negotiated prices and calculated profits can be significantly impacted if the exchange rate moves against you on the day a payment is being made or received. This can be a major concern for small and medium-sized enterprises, which don’t have a specialist risk team in-house.

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If you have any questions around the currency impacts to your business resulting from the coronavirus, please feel free to give us a call or email the below address.

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^[1] V. Mishra, ‘Chinese economy clobbered by coronavirus but set to recover soon - Reuters poll’, Reuters, Reuters, 2020, https://uk.reuters.com/article/uk-china-health-economy-poll/chinese-economy-clobbered-by-coronavirus-but-set-to-recover-soon-reuters-poll-idUKKBN20801Y, (accessed 27 February 2020)

^[2] S. Nellis & Y. Lee, ‘Coronavirus clouds Apple's timeline for new iPhones’, Reuters, Reuters, 2020, https://www.reuters.com/article/uk-china-health-apple-iphone-focus/coronavirus-clouds-apples-timeline-for-new-iphones-idUSKBN20J2GJ, (accessed 27 February 2020)

^[3] T.Clayton, ‘Coronavirus Outbreak: How Has Virus Panic Impacted Markets - Latest Charts & Economic, Currency Exchange Rate Forecasts’, Exchange Rates, Exchange Rates, 2020, https://www.exchangerates.org.uk/news/28494/2020-02-03-coronavirus-outbreak-how-has-2019-ncov-virus-panic-impacted-markets-has-it-peaked-latest-economic-currency-impact-forecasts.html, (accessed 27 February 2020)


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