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Taken with permission from March 5th’s 2020 Apliqo blog post
Almost 2 months following the outbreak of COVID-19, infections in China are finally dropping. But with the world’s second-largest economy still in lockdown, we take a look at the economic repercussions of this virus and how your business can prepare for them.
Understanding China’s Global Economic Role
To better understand the potential economic repercussions of the coronavirus outbreak, we need to have a solid understanding of China’s role in the global economy.
After launching its economic reform in 1979, China has shown impressive economic growth for almost 40 years. Today, China is the world’s second-largest economy and the backbone of countless industries around the globe.
China is the world’s fastest-growing consumer market, largest manufacturing economy, and biggest exporter. It’s also home to the headquarters of 129 Global 500 companies and has remained the world’s largest trading nation since 2014. In 2021, China’s share of the global gross domestic product is expected to be over 20%.
In 2018, the Chinese generated 33% of global spending on luxury goods. That same year, Chinese tourists also spent $130 billion overseas, making them the world’s biggest-spending travelers. With the outbreak of the coronavirus, however, China’s economy came to a sudden standstill.
In February 2020, China’s official Purchasing Managers’ Index fell to 35.7, the lowest it’s been since 2004 and a sign of contracting manufacturing activity. Desperate to control the spread of the virus, the Chinese government shut down factories and retail stores and quarantined workers. According to NPR, the countries strict quarantine measures prevented 300 million migrant workers from returning to their jobs.
China has also forced airlines to ground its planes during Lunar New Year, one of the nation’s most important holidays and a big time for travel and spending. The lockdown is expected to cost Chinese airlines over $12 billion, while the global airline industry is expected to lose $29 billion.
Given that China is such an important cog in global economics, the repercussions of the coronavirus outbreak can already be seen throughout Asia, the US, UK, and Europe.
For Japan, for example, the coronavirus could not have come at a worse time. Since October 2019, the nation has battled a devastating typhoon and consumer tax hikes that caused its economy (the third-largest in the world) to shrink by 6%. Now, with it’s largest trading partner and biggest tourism driver on the ropes, Japan is expected to go into recession.
Countless other Asian countries are also heavily reliant on China, for trade and tourism including Hong Kong, Singapore, Vietnam, Cambodia, India, and The Philippines. Singapore’s Prime Minister Lee Hsien Loong has announced his fears of a recession, with his nation’s GDP expected to drop to a 0.5% contraction as a result of China’s economic standstill.
Only weeks ago, Germany’s Bundesbank also warned its economy (the fourth-largest in the world) was facing serious “economic risks with regard to the coronavirus outbreak.” Germany is China’s biggest trading partner, technology exporter, and second-largest investor in Europe, and analysts at Moody’s Investors Service expect the nation’s economic growth rate will drop to just 1% as a result of the virus.
In the US, stock prices plunged to their lowest since 2008 and the central bank isn’t just considering cutting interest rates, the decision has been made and announced to drop rates by ½ a percent to target zone of 1% to 1.25%. Yields on the US’ benchmark 10-year treasuries also dropped 11 basis points, while Footsie, DAX, CAC 40, and S&P/ASX 200 stocks all dropped by up to 2.8% in response to the COVID-19 outbreak.
How can your business best prepare for the Coronavirus?
Obviously, the main focus regarding the coronavirus needs to be its containment and mitigation. However, businesses will also want to be aware of the economic repercussion of the virus and how to best prepare for them.
Below are some tips to help your team prepare your business as best as possible for the coronavirus:
- Run regular Scenario Analysis: Scenario Planning is one of the best weapons in your arsenal against times of financial/economic uncertainty. Unlike Trend Analysis, Scenario Planning works by building multiple plausible scenarios and painting a detailed picture of the effects each scenario will have on your company’s key drivers. Every day harbors new developments regarding the coronavirus, so it’s important your FP&A team run regular scenario plans to stay prepared on how the outbreak of the virus might affect your company.
- Beware of the “hype”: News organizations are concerned with making headlines. Hence, they don’t always make the best distinction between hard facts and speculation. As you stay up-to-date regarding the COVID-19 outbreak, make sure you read more than just the headlines and take your time to discern what news is really worth considering in your plans.
- Stabilize your supply chain: Global supply chains are one of the main economic areas affected by the coronavirus, mainly because China is behind so much of the world’s manufacturing. As you run your Scenario Analysis, pay close attention to how different outcomes will affect your supply chain and try to anticipate any interruptions to your chains as early as possible.
- Use event trees: Event Tree Analysis is a forward-looking, top-down planning method that helps you explore the effects of multiple responses to a single event. Use them together with your Scenario Planning to really paint a clear picture of what responses are available to you in different scenarios concerning the coronavirus outbreak. Like with Scenario Analysis, make sure your team doesn’t get carried away planning for too many different events. Instead, always focus on the events that, based on hard facts, are the most probable.
Remember, the coronavirus is most importantly a health issue. If it affects your company, your top priority should always be caring for the health and safety of your entire team before focusing on your business.