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Coronavirus & Impact on Economy – The Big Picture – RSTV IAS UPSC

  • IASbaba
  • February 25, 2020
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The Big Picture- RSTV, UPSC Articles
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Coronavirus & Impact on Economy

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Topic: General Studies 2:

  • Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
  • Issues relating to development and management of Social Sector/Services relating to Health.

In News: Nearly two decades have passed since a coronavirus known as SARS emerged in China, killing hundreds of people and sparking panic that sent a chill through the global economy. The virus now rampaging across China could be much more damaging. The human cost of the coronavirus outbreak is climbing across China and beyond. The economic cost is also mounting. That damage is, for the most part, not due to the virus itself, but due to efforts to prevent it from spreading. 

China has become an indispensable part of global business since the 2003 SARS outbreak. It’s grown into the world’s factory, churning out products such as the iPhone and driving demand for commodities like oil and copper. The country also boasts hundreds of millions of wealthy consumers who spend big on luxury products, tourism and cars. China’s economy accounted for roughly 4% of world GDP in 2003; it now makes up 16% of global output.

SARS sickened 8,098 people and killed 774 before it was contained. The new coronavirus, which originated in the central Chinese city of Wuhan, has already killed more than 900 people and infected over 40,000 across at least 25 countries and territories. Chinese officials have locked down Wuhan and several other cities, but the virus continues to spread.

Why is China so important to the global economy?

China’s extraordinary economic surge over the past 40 years has resulted in it becoming the world’s second biggest economy, with a GDP of $13.6tn (£10.4tn) (compared with $20.5tn for the US). Annualised growth of 7% and more – way beyond the capacity of developed economies – has become the norm.

Coronavirus & Impact on Economy – The Big Picture – RSTV IAS UPSC

Coronavirus & Impact on Economy – The Big Picture – RSTV IAS UPSC

China reached this position by supplanting the US as the fulcrum of global trade. Beijing is the largest trader of merchandise in the world, and is fast catching the US in commercial services following an 18% growth spurt in 2018. The long-held practice of sourcing components and widgets from Chinese companies, and the country’s vast and growing domestic market, has encouraged thousands of foreign businesses to open their own factories on the mainland, join local distribution networks and open shops.

China is also central to a diverse range of global supply chains: much of the world’s raw materials travel to China before being turned into a manufactured product. Last year’s battle with the US over import tariffs on billions of dollars’ worth of goods illustrated the power of the Chinese economy to disrupt and disturb the global outlook.

What is happening?

Transportation

  • There are strict restrictions on moving out of Wuhan, where the outbreak began, a city with a population of 11 million. The lockdown, also now extended to other parts of Hubei province, prevents business-related travel as well as the movement of goods and workers.
  • The impact is not confined to China. International retailers have closed operations in China. 
  • Several overseas airlines have stopped flights to China and international hotel chains have been offering refunds. 

Supply Chain

  • And beyond that, there is growing concern about integrated international supply chains. Hyundai, of South Korea, has suspended its car production because of problems with the supply of parts from its operation in China – an early warning sign of possible extensive disruption ahead. 
  • Prices for key industrial raw materials such as copper, iron ore, nickel, aluminum and liquid natural gas have plummeted since the virus emerged. 
  • And manufacturers, mining companies and commodity producers of all stripes are weighing whether they will be forced to cut back on production for fear of adding to a growing inventory glut.
  • The woes of the commodities markets — arguably the worst-performing asset in financial markets this year — reflect the basic reality that China’s industry-heavy economy is the most important consumer of raw materials on earth.
  • For some, the decline in copper is an ominous sign: Copper has long been considered an unofficial leading indicator of the direction of the global economy, because of its close connection to the industrial sector.

Global condition

Currencies of countries that export these goods at high rates, including Brazil, South Africa and Australia, are near their lowest levels in recent memory. 

  • Debt levels have soared in the United States, Japan and key European countries including Italy, limiting the scope for a big fiscal stimulus if the world economy goes into another tailspin. Global debt, including borrowing by households, governments and companies, has jumped to more than three times the size of the global economy, the highest ratio on record, according to the Institute of International Finance.

Economists say the current level of disruption is manageable. If the number of new coronavirus cases begins to slow, and China’s factories reopen soon, the result will be a fleeting hit to the Chinese economy in the first quarter and a dent in global growth. If the virus continues to spread, however, the economic damage will increase rapidly.

Coronavirus & Impact on Economy – The Big Picture – RSTV IAS UPSC

Coronavirus & Impact on Economy – The Big Picture – RSTV IAS UPSC

Epidemic risk

Economists have a hard time working out the potential costs of epidemics because of their unique characteristics. Yet diseases can be far more damaging than natural disasters such as hurricanes or a tsunami, or other unpredictable events known as “black swans.” 

According to a study by the World Bank, a severe pandemic could cause economic losses equal to nearly 5% of global GDP, or more than $3 trillion. Losses from a weaker flu pandemic, such as the 2009 H1N1 virus, can still wipe 0.5% off global GDP.

The virus is not the driving factor behind those losses, however. Instead, it’s the way consumers, businesses and governments respond to an outbreak that matters most. People are more likely to stay home during an outbreak to avoid getting sick, preventing them from traveling, shopping and working. Doing so limits demand for consumer goods and energy. Decisions by companies and governments to close shops and idle factories, meanwhile, curtail production.

Is there a way ahead?

  • China’s government has moved quickly to counter the economic fallout from the coronavirus and the measures taken to contain it. The People’s Bank of China cut a key interest rate and injected huge amounts of cash into markets in order to help take the pressure off banks and borrowers. Officials have also announced new tax breaks and subsidies designed to help consumers.
  • Yet China is also more vulnerable to a crisis than it was 17 years ago when SARS broke out. It has much higher debt, trade tensions with a major trading partner and its growth has been steadily slowing down for a number of years, which gives a weak starting point to face such a crisis.

Analysts at Capital Economics expect the government to announce additional measures in the coming days. If the virus keeps spreading, they believe that Beijing will have to abandon its long-running efforts to get its debt under control and pump money directly into the economy.

Note:

Pangolins be the source of novel coronavirus

  • The genome sequence of the coronavirus isolated from pangolins was 99 per cent identical with that separated from infected humans.
  • Pangolins are considered to be one of the most trafficked animals in the world and are classified as a critically endangered species
  • People who sell pangolins can be imprisoned for a period of 10 years or morepoached every year due to their “medicinal value” and the consumption of their meat in countries such as China and Vietnam.
  • It is believed that the novel coronavirus spread from the seafood market in Wuhan, where live animals are sold
  • The SARS coronavirus, which was identified in 2003, is believed to have spread from bats to civet cats to human beings.

Connecting the Dots:

  1. A severe pandemic would resemble a global war in its sudden, profound, and widespread impact. Explain.

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