How will the coronavirus affect the world economy?

Less consumption, idle factories, broken global supply chains. It's not just the Chinese economy that is suffering from the spread of the coronavirus — but the moment of truth is yet to come.

The coronavirus epidemic is spreading further in China and Chinese experts believe that it could peak in 10 to 14 days. Around 45 million people in the Chinese province of Wuhan are cut off from the outside world. In order to curb the spread of the virus, Beijing has extended the Chinese New Year holiday, and pushed back the opening of the stock markets. When it finally opened on Monday, stock prices crashed. They, however, stabilized again on Tuesday.

As a precaution, Beijing had given the financial system an unusually high injection of 1.2 trillion yuan (€156 billion, $171 billion) to keep the domestic money market and banking system functioning. In addition, import duties on goods that are important in the fight against the disease were eased.

Closed offices and factories

But it's not only the stock markets that have been hit. Chinese consumption has also plummeted as a result of the outbreak. Large New Year's events were canceled; tourist attractions and cinemas were closed. The doors remain closed at around 2,000 Starbucks, hundreds of McDonald's restaurants, 130 Uniqlo shops and at all 30 Ikea stores.

The travel industry has also been badly affected. Several countries issued travel warnings about China; some airlines even suspended flights to China. Lufthansa and its subsidiaries Swiss and Austrian Airlines canceled their connections to and from Beijing until February 29. The Chinese authorities urged its own population to postpone travel abroad and prohibited domestic travel groups.

Most factories and offices will remain closed this week. Additionally, China's largest oil refinery cut production by around 600,000 barrels a day due to shrinking fuel demand.

Supply chain disruptions

The outbreak of the coronavirus is meanwhile rippling through the global manufacturing supply chains, affecting especially the car industry. The world's fifth-largest carmaker, Hyundai, for example said on Wednesday it had to close all its car factories in South Korea because it had been running out of components made in China. The carmaker is short on supplies of engine wire harness, and said is was looking for a new supplier.

Executives at a number of carmakers and auto parts suppliers warned that plants in Europe and the United States were just weeks away from being forced to close.The entire industry depends on a global network of suppliers, with parts originating in China often passing through companies in several countries before being built into cars in Europe and the US. 

In Germany, carmakers such as VW and BMW have announced the temporary closure of their production plants in China, saying they expect to resume production next week in accordance with guidelines from authorities. However, those plans could be reviewd if the coronavirus continues to spread. 

Industry analysts already say the impact of the virus on car sales and parts procurement could be bigger than from the outbreak of the SARS epidemic in 2003. 

Learning from SARS

When SARS hit China 17 years ago, domestic trade suffered significantly and stock markets fell. However, the global economy is now much more interconnected and the Chinese economy is much more important. At the time China's share of the world economy was only around 5%, today it is more than 16%.

Now the world's second-largest economy is an important export market for German products, an important production location for German industrial companies and the starting point for many global supply chains.

The ifo Institute's economic expert Timo Wollmershäuser believes that "the economic consequences will be greater than the SARS epidemic." That crisis, which lasted 6 months, cost China about 1% growth in gross domestic product (GDP), a number so small that it was hardly reflected in the German figures. "Since then, the country's economic importance has grown, the infection rate is greater and the Chinese government has reacted harder," said Wollmershäuser.

Ifo has calculated that a drop of 1% in China's GDP due to the coronavirus could cut German GDP by 0.06% now. 

Too early for a true analysis

Many experts believe that it is too early to talk about the extent of economic consequences. Jens Hildebrandt, the director of the German Chamber of Commerce in Beijing, told DW that the country is at a practical standstill anyhow because of the Chinese New Year and spring festivities. "All factories close for three to four weeks," he added. Thus, even under normal circumstances, the entire economy — except for the important tourism industry — would be offline.

How the coronavirus outbreak is impacting employment and ongoing production will only become apparent from next or the week after next, according to Hildebrandt, since the Chinese government has extended the holidays until February 2 and in some cities until February 9.

The reason is that a large part of the factory workers come from the region around Wuhan, which is almost completely quarantined, says Hildebrandt. Only in the coming week will it become clear how many workers will return to the main production locations in the Shanghai and Beijing areas and in southern China, and to what extent production and thus the international supply chains will be affected by the virus.

Hitting the supply chain

"We see no signs as of now that supply chains will be completely disrupted, even if there are delays," said Gerhard Wolf, head of foreign trade at the Association for Wholesale, Foreign Trade and Services (BGA). His credo: No need to panic.

So far, there is no trace of panic among German companies, says Hildebrandt from the German Chamber of Commerce in Beijing. "At the moment they are acting rather calmly, though plans are being drawn up for how to deal with the situation."

The German Institute for Economic Research (DIW) is also taking a careful approach. "It is still far too early to be able to carry out a serious analysis of the economic effects of the coronavirus," said DIW President Marcel Fratzscher. "If the spread of the coronavirus in China and worldwide can be successfully contained, then the economic costs should be limited and be limited to a short-term loss of production in China."

Stopping the supply chain

However, should the production stops in China last longer, the international supply chains would be at risk, warns Klaus-Jürgen Gern from the Kiel Institute for the World Economy.

"China is significant as a supplier to the rest of the world," said Gern. A long standstill could interrupt supply chains in the chemical, automotive, textile and electronics industries, warn Allianz economists. International companies would no longer get the parts they need and would have to find other suppliers or shut down production.

One that has already been hit is the South Korean manufacturer Hyundai Motor. The company announced on Tuesday it would suspend all production in South Korea later this week. The reason for the suspension is that the cable harnesses required for production, which Hyundai usually gets from China, are just not coming.