Mar 06, 2020 | News Releases

Coronavirus: are we heading to a new crisis?

More than fifteen years on from the SARS epidemic, China once again faces a large-scale virus outbreak but this time in the city of Wuhan within the Hubei province – the so-called ‘industrial powerhouse’ of the world’s number two economy. It’s Wuhan’s connection to the rest of the world and the rate at which this virus is spreading that has claimed as many as 3,110 lives worldwide as of March 3rd, dwarfing the 774 deaths attributed to the SARS outbreak of 2002-2003. [1]

However, the Coronavirus – also known as COVID-19 – still remains significantly less fatal than SARS was, with a mortality rate of 3.4% according to the World Health Organisation (WHO), which is about four times less than the 9.6% mortality rate recorded under SARS. Nevertheless, with COVID-19 now in five continents and impacting 80 different countries, the WHO could soon update its global health emergency rating to a ‘global pandemic’. This prospect of further escalation is what’s driving fear across financial markets and forcing us economists to quickly reassess implications for the world in 2020. 

Quantifying the risks not easy

While it is relatively easy to measure the human impact, it is much more difficult to quantify the economic impact, especially at a global level. Historical comparisons to SARS will not hold water because in 2003, China’s share of world GDP totalled 4% compared to its 16% contribution today. [2] Also, the comparable rate of China’s economic growth and the reliance of world demand on its economy is much higher today, while the material integration of China into the supply chain of many international companies like Apple Inc. raises concerns of a ‘double impact’.

If the economic shock that China is delivering now is indeed a double impact – both on the demand-side as well as the supply-side - then the subsequent downside effect on global GDP may be much larger than previously estimated. If we take the OECD’s response in March, it revised its Chinese growth projections for 2020 by -0.8% to 4.9%, versus its 5.9% forecast in November 2019 before the outbreak started. For the global economy, it downgraded its 2020 forecasts from 2.9% to 2.4%. We are entitled to wonder about this estimate which should be revised down further as COVID-19 spreads internationally. If a global pandemic is declared by WHO, the fallout should be greater, and I’ll go on to explain later why the US central bank is already front-running this possibility.

Who is most exposed?  

Several groups are working on a vaccine, but updates suggest it will not be ready until next year. In the absence of an effective treatment, the fastest option to stem the virus’ spread is the implementation of a containment policy, both for the public and for businesses. However, such a policy means the temporary closure of factories in the manufacturing sector and a sharp reduction in activity in services sectors like travel and leisure. This temporary interruption of activity will cause a drop in domestic consumption across major economies, with some countries more vulnerable than others to a prolonged disruption.

Geographic proximity and stronger economic ties with China mean that Asia (mainly Japan, South Korea, Singapore and Thailand) and countries across Oceania (Australia and New Zealand) are among the first to feel the effects of the Chinese economic slowdown. However, Europe is vulnerable too. The fragility of Europe’s vast automotive industry was already an issue, with a contraction of growth in Q4 2019 across France and Italy, and zero growth in Germany. China is the number one export market for German manufacturers. [3] Therefore, the COVID-19 crisis comes on top of the ongoing US trade disputes and Brexit uncertainty already effecting Europe’s carmakers.

For Germany’s BMW/Daimler and Volkswagen businesses, 30% and 40% of revenues come from China respectively. [4] While Germany is most at risk, France is less so with 4% of exports and 7% of total trade linked to China. [5] The domino effect for Europe from Germany is also important, given that 70-80% of EU’s trade is with each other, suggesting that if Germany’s economy slips towards contraction, then others will suffer, especially those who trade mainly with Germany.

The demand and supply side dilemma

In terms of industry sectors likely to be most affected by this health crisis, it is necessary to distinguish between those linked to the demand shock versus the supply shock. From the demand side, we already see the immediate impact on travel and tourism with China and neighbouring countries like South Korea where 2,000 COVID-19 cases have been reported. Japan is also at risk, and now has the issue of the Olympic games to consider. As a result, the International Air Transport Association (IATA) predicts an earnings hit of $29.3bn for air carriers this year.

Chinese tourists are also the world’s biggest spenders, contributing $258bn and 17% of total foreign tourism spending globally in 2018. [6] France welcomed 950,000 Chinese tourists and $1.1bn of spending in 2019 alone, underlining the world’s need for China to travel and spend. China is also the world’s biggest importer of raw materials such as petroleum, iron and copper so this puts industrial sectors in countries like Australia at risk.

From a supply chain disruption perspective, high tech and electronic sectors may be most exposed and impacted, headlined by Apple Inc. which manufactures its iPhone 11 through its Chinese subcontractor Foxconn, and has already issued virus-related downgrades to earnings. Still, the supply impact extends far beyond Apple and high-tech, given that Beijing has shutdown factories and critical hubs and ports that facilitate so much trade across industry, textiles and pharmaceuticals. Indeed, 20% of Active Pharmaceutical Ingredients (API) in the world is produced in China, and approximately 60% of paracetamol [7].

13% fall in stocks spurs emergency response

Across financial sectors, debt repayments will become an issue, and it’s why the US Federal Reserve shocked markets on March 3rd with a 0.5% interest cut – it’s first emergency cut before a scheduled meeting since the Financial Crisis of 2008. China’s SMEs will need to manage cash flow shortages and if they are also under pressure from debt payment requirements, then the vulnerable firms will be desperate not to see COVID-19 extend into a major global pandemic scenario. In the US, the country faces a number of challenges related to financial markets as more than half of American people own shares. [8]  Therefore, the -13% fall in US and European stock markets in the last week of February – the type of correction last seen in 2008 – and the subsequent impact on consumer spending, is another key factor behind the Fed’s emergency response on interest rates and why we may see further cuts in the coming months.

According to Mckinsey’s research there is still a higher probability of a major global economic slowdown versus an all-out global pandemic and recession. However, should the corrections in US financial markets escalate, and if a US demand shock then adds to what China is already delivering, then more central banks globally will need to respond. Although Australia, Canada and the US have recently cut rates, we think that monetary stimulus should be more limited compared to a previous crisis like 2008 as global interest rates are already so low. In Europe, negative interest rates should urge governments to activate fiscal stimulus. Furthermore, among the risks we identified behind the threat of a pandemic is a major supply shock and a breakdown in supply and logistics. This cannot simply be resolved by massive injections of cash into money markets through monetary stimulus.

Foreign exchange implications for companies

The issue of geopolitical uncertainty, and the impact on foreign exchange volatility is what will challenge international companies in the coming months, maybe even quarters. According to our own global study [9] - a survey of over 4,000 companies worldwide with international payments and FX services needs - 66% of decision makers said its the two issues of geopolitics and market volatility that make effective planning and currency management the most challenging. Geopolitical issues are so much harder to quantify while global events or incidents like COVID-19 have such different effects on currencies dependent on market sentiment at the time.

Japan’s Yen and the Honk Kong Dollar, for example, have performed well this year, despite their economic exposure to China, as these two countries are seen as haven assets or ‘shelters’ in Asia during times of turbulence. The Australian Dollar and Thai Baht however have a higher ‘risk profile’ for investors and therefore both have depreciated markedly. China’s Yuan is so far seeing limited losses, partly thanks to its global reserve currency status as well as numerous support measures quickly announced by Chinese authorities. The currencies of net commodity exporting countries like Norway are paying a heavy price so far, reaching historic lows.

The Euro - and companies with large exposure to the currency’s value – is experiencing a roller-coaster start to the year, first losing 4% of its value against the US Dollar to reach almost 3-year lows of $1.08, but it then erased all losses and appreciated unexpectedly when global stock exchange collapsed in late February. If this type of turbulence continues in the world’s most traded currencies, there will be consequences for others.

It is this type of market volatility that makes planning forward hard for companies who seek clear longer-term trends but are faced with short-term gyrations in currency rates. Our global FX Barometer research study also shows that one in four companies, in sectors such as manufacturing, said they would face financial difficulty if faced with a negative currency swing of 10% or more.

How can companies respond?

Western Union Business Solutions supports over 60,000 companies worldwide, and as an expert in financial risk management and international payments, here are some key considerations we’d recommend to help support: 

  1. If you are being impacted by supply chain disruption and need help with geographic diversification, we may be able to guide you on alternative suppliers. Alternatively, there are government resources as well as public information sites like UN Comtrade that can provide guidance. 
  1. If you are being exposed to currency volatility or cash flow risks and need help with developing a counter strategy, or need more guidance on what types of currency products are available for companies that have longer-term payment needs, then click here to contact one of our solutions experts.
  2. If you need help keeping up to date on the latest news related to the Coronavirus crisis to inform your continuity plans, you can access the World Health Organisation’s resources through its website or ask to join our webinars. For daily updates on the virus’ impact on the market, then click here to register for our daily reports that are available in over 5 languages and 15 different countries. 

Article written by Guillaume Dejean,
Senior FX Analyst at Western Union Business Solutions


[1] International Monetary Fund – 2019 data

[2] World Health Organisation – 03.03.2020



[5] IMF Direction of Trade Statistics - 2018



[8] Gallup – 2019 report on US shares

[9] WUBS FX Barometer research study, 2020