COVID-19
Coronaviruses are a large family of viruses that cause a variety of respiratory illnesses from the common cold to more serious infections such as SARS and MERS. Recently a new strain of coronavirus has spread which has been given the name of COVID-19.
This coronavirus is known as zoonotic, meaning it was initially spread from animals to humans. In this case it is believed that COVID-19 originated from bats in a live market in Wuhan China. The first case was recorded in Wuhan China on December 1, 2019 and since then it has spread to more than 100 countries around the world.
Common signs of infection include respiratory symptoms, fever, cough, shortness of breath and difficulty breathing. In more severe cases, the infection can cause pneumonia, severe acute respiratory syndrome, kidney failure and even death. COVID-19 is found to be most dangerous to individuals over the age of 50.
In addition to the obvious health concerns of the coronavirus there are severe economic impacts. Read on to learn more about how COVID-19 is affecting manufacturing, global markets, and the entire financial system.
COVID-19 and Global Manufacturing
Because COVID-19 started in China, it has become the first country to feel the effects of the virus. One of these effects is on manufacturing. Because the factories spreading the virus had to shut down to stop the spread of the virus to the workforce. In some cases, factories cannot find enough workers.
The situation caused China’s Purchasing Managers’ Index, an official measure of the country’s manufacturing strength, to plunge to 35.7 in February from January’s reading of 50. Anything below 50 indicates a contraction in manufacturing activity.
China is the world’s largest exporter, and it accounts for about a third of the world’s manufacturing capacity. This means that the decline in Chinese manufacturing will have ripple effects around the world. Not only that, but as COVID-19 spreads every country will have their own manufacturing struggles.
As of mid-March 2020, China’s factories were reportedly back to normal, but at the same time countries from South Korea to Italy to the United States were all forced to quarantine their populations, shutting down much of the world’s manufacturing capacity.
Disrupted Markets and Supply Chains
One of the most obvious effects of the manufacturing slowdown is in global supply chains. With Chinese manufacturing companies slowing around the world have seen their shipments affected. A recent survey of electronics manufacturers has shown most companies now face three-week delays in receiving needed parts, and a smaller number have cited delays of six weeks or longer.
These delays will trickle down the supply chain and many manufacturers do not believe things will return to normal until July at the earliest, and potentially as late as October. 25% of those surveyed said it was too early to say when the supply chain might return to normal.
Consumers will soon begin to feel the effects of this as some items will become unavailable. Apple has warned of possible shortages in iPhones and parts, and Facebook has begun to run out of their Oculus Rift VR headset. That may only affect a small subset of users, but there are far reaching shortages that are soaring. For example, Coca-Cola has reported that a delay in the artificial sweetener component could lead to a shortage of Diet Coke.
Other items may soon be in short supply as well. For example Procter & Gamble, which produces consumer products from detergents to toilet paper to diapers to toothpaste and more. They have more than 300 suppliers in China who provide more than 9,000 different ingredients for their products. There’s no telling how many of those products could face shortages due to supply chain issues.
Other shortages are expected to come in the automotive parts industry, the computer memory industry, and more. Supply chain disruptions are expected to affect about three-quarters of US companies. And soon shipping and delivery challenges could add to supply chain problems, especially if more countries are forced to impose lockdowns similar to those seen in Italy.
Financial Impact of COVID-19
At this stage, it is impossible to say how much the financial and economic impact of COVID-19 will be. At least companies and the global economy will see a quarter of their earnings and growth decline. The most obvious effect so far has been the massive volatility seen in global financial markets, with nearly every major global stock index falling into a bear market. In the US this has halted an 11-year-old bull market, and has seen some stocks lose half their value.
All over the world sports leagues have suspended games, resorts, hotels and recreational areas have closed, festivals have been canceled, schools have closed, and businesses have asked their employees to stay at home. All this will have a huge impact on firms and financial markets, not only now but in the coming months as well.
In China alone it is expected that growth will not only slow down, but the first quarter GDP could contract by more than 8%. And with cases increasing worldwide, perhaps this could become a global recession, attracting every major and small economy around the world.
Individual companies will obviously be affected differently, but income is guaranteed for contracts for the majority of companies, and a large number of companies could go out of business due to the slowdown caused by the virus.
Global Pandemic Response
The response to the virus has been different in countries around the world, and different responses have produced very different results. For example, both Hong Kong and Singapore were hit early by the coronavirus, but each had fewer than 200 cases. Japan and South Korea saw spikes, but quickly peaked in the number of new cases and reversed the spread of the virus. All these countries have one thing in common, they are responding quickly to the threat of COVID-19 and they are using all available elements to fight the spread of the virus.
Unlike Italy or Iran. In both countries, the government appeared to be in denial about the disease before the first cases appeared on their borders. When people started getting sick in both countries, the response was slow. Neither country does much testing. It did nothing to stop the mass gatherings, and the result was an exponential increase in the number of cases, with both countries overwhelmed.
In the United States the virus has only just begun to take hold, but so far the response has been one of the worst worldwide. Very few tests were done, the country’s leaders were in denial until the second week of March, and no measures were taken to stop mass gatherings. That could change as much of the US has stopped mass gatherings on March 15, and the government has pulled out all the stops to combat the virus’s health and economic impact.
By mid-March, it was clear that governments around the world were taking COVID-19 seriously, and every possible action was being taken to lower the number of new cases and end the epidemic as soon as possible.
The COVID-19 Financial Crisis
Of course in addition to the health crisis and the economic crisis of COVID-19 there is also a financial crisis in the world market. This has extended to almost every asset class as cash is once again king, and everyone has sold everything to raise cash.
This has caused some serious implications for financial markets as stocks have been hit, bond yields have fallen to historic lows, and even safe-haven assets like gold and Bitcoin have been seen selling off to raise cash. The underlying fear under all this is the threat of a deep global recession, or potentially even a global depression.
Not since the 2008 financial crisis has the market been under such pressure. In the United States, the Dow Industrials suffered its worst session since Black Monday in 1987. Crude oil also suffered heavy losses as traders worried about falling demand and the price war between OPEC and Russia causing increased supply to hit the market at the worst possible time. That saw the worst daily and weekly falls since the 1991 Gulf War.
The good news for financial markets is that banks are in much better shape now than they were in 2008. They have much more capital and liquidity now than they did in 2008.
The currency market is also not immune to fluctuations and gyrations either because the central bank has quickly reduced interest rates and provided financial stimulus measures. This has seen the US dollar make big gains against rival currencies, with the exception of the safe haven Yen, which itself has seen a huge surge in strength against its rivals.
Conclusion
The effects of the Coronavirus turned out to be much worse than the market expected when it first appeared in December 2019. At the time, it was thought that the virus would cause problems for China, but the rest of the world would be able to compensate with some additional financial stimulus and life would go on as usual. normal The events of early March around the world have been far from normal.
Financial markets will recover, and when this happens profits can be great. No one knows when this might happen though, so it pays to stay alert. Watch individual stocks, sectors, and asset classes for signs of recovery and be ready to jump in at the right time.