Will the coronavirus outbreak cause a global economic downturn?
Tuesday, February 25, 2020
The COVID-19 coronavirus outbreak, also known as Wuhan pneumonia, is at a turning point from an epidemic to a pandemic. According to an update from the Centers for Disease Control and Prevention on Feb. 22, a total of 32 countries have reported confirmed cases.
Besides mainland China, where the coronavirus outbreak first started, many other places also show signs of failing to contain the disease. In South Korea, for example, the confirmed infected cases went up to 763 on Monday (February 24) morning. Six days earlier, on Feb. 18, the country only had 31 cases.
Travel restrictions due to the coronavirus outbreak
Effective on Feb. 2, all aliens who have visited mainland China, “during the 14-day period preceding their entry or attempted entry into the United States,” were suspended to enter the United States, with some exceptions. The U.S. Department of State also issued a “Level 4: Do Not Travel” warning to its citizens who plan to visit China.
Countries around the world have shut down the border with China or put in place a tight restriction to stop the tourists who had visited mainland China in the past 14 days from entering the border. Turkey and Pakistan also closed their borders with Iran.
There is no domestic travel in the places where lockdowns and restricted-access are in order, like in central China, Daegu in Korea, and the northern part of Italy. People are advised to stay at home and restrict any gatherings or group activities.
Coronavirus’ immediate impact on the airlines
Airlines are canceling flights to and from China amid coronavirus fears. From Jan. 23, when China began imposing the travel ban until Feb. 13, departures and arrival flights in China dropped from 15,072 to 2,004 a day (domestic and international flights).
It is estimated that the global airline industry would lose $30 billion due to the coronavirus outbreak. Not surprisingly, Airlines operating in the Asia-Pacific regions would face the biggest hit with a $27.8 billion drop in revenue.
Comparing to what happened during the SARS outbreak in 2003, the airline industry lost $6 billion. It took nine months for international traffic to recover. Back then, however, there were a lot fewer Chinese traveling overseas than today.
Coronavirus’ impacts on the tourism industry
In 2018, the Chinese spent $277 billion in international tourism. The United States came second but only with $144 billion. When the Chinese are not traveling or restricted to travel, the global tourism industry will suffer.
In the state of California alone, the Chinese tourists spent $4.015 billion in 2019, about 37% of the market share in the U.S. in terms of spending. There were 149 weekly nonstop flights, an equivalent of 45,000 weekly nonstop seats, flying in and out in Los Angeles, San Francisco, and San Jose.
Now, all major U.S. airlines have already canceled all China-bound flights until March or April. California is likely to lose about one-quarter of its income from Chinese tourists in 2020, at about $1 billion.
As far as the global tourism industry is concerned, when the Chinese do not travel during the first quarter of 2020, that means a loss of $69 billion.
Coronavirus’ impact on the global supply chain
China has been a global factory for many years. Since 2018, the trade war between the U.S. and China began pushing more U.S. manufacturers to consider shifting production to other countries besides mainland China. Still, many companies are now facing a supply chain dilemma when Chinese workers are staying at home as a remedy to prevent further outbreak of the coronavirus.
Apple, for example, relies on Foxconn in China to assemble most of its products. Due to the coronavirus outbreak, however, it is uncertain when Foxconn will reopen its factories. It is hoped Foxconn may be able to resume 50% of its production level by the end of February.
Meanwhile, Apple has closed all 42 stores in China and does not know when they will be open again. Apple’s outlook gets double-hit by both supply and demand.
According to a prediction from the Oxford Global Economic Model, if the pandemic is limited to Asia, the world GDP would fall by $0.4 trillion or 0.5% in 2020 as compared to its baseline model. If the pandemic is a global issue, the world GDP will drop by $1.1 trillion or 1.3%. As a reference, the U.S. GDP in 2019 increased by 2.3% from 2018, with a current-dollar GDP of $21.43 trillion.
When will the pandemic end?
The Chinese government, along with the World Health Organization, has been consistently optimistic about the situation since its outbreak. I also wish the coronavirus has already been well contained by now. Nevertheless, I can’t help having a second thought when looking at the new confirmed infected cases in Japan, Korea, Italy, Iran, and other parts of the world. My suggestion is to hope for the best but prepare for the worst.
Have you already noticed the negative impact of the coronavirus outbreak? What do you see the outlook of the economy? What are your suggestions for dealing with such a public health crisis?
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