The WHO has declared the COVID19 (Coronavirus) a public health emergency, and with the spread of the virus we know that there will be a large economic fallout. The exact amount is difficult to quantify at this stage, but anecdotally there is plenty of evidence, and qualitative projections can prove that the COVID19 virus will launch a fatal blow to the global economy.
Although governments are keeping the stock market buoyant, the restlessness and unease in the market is apparent when speaking to those individuals invested in it. Further anecdotal evidence can be found when speaking to small business owners. Many of these owners depend on China for manufacturing, but shipments have slowed considerably, putting these business owners at risk of bankruptcy. Companies that have put all their eggs in the China basket are feeling the pain far more greatly.
Baltic Dry Index – A Leading Indicator
The Baltic Dry Index (BDI) is a leading indicator of global economic problems, and the index has been dropping since September 2019, hitting its lowest point of 411 on Feb. 10, 2020. The Baltic Dry Index does not tabulate shipping only in the Baltic seas. The Index which is reported daily by the Baltic Exchange Maritime UK in London includes data on 23 shipping routes and the shipment of many commodities that cross the oceans. The BDI is based on supply and demand, and demand for raw materials indicates economic growth. Slower demand therefore portends an economic slowdown.
The drop in the BDI is symptomatic of the trade war between China and the United States, but a greater effect has been seen in the last two months as China has slowed production due to the Coronavirus Outbreak. This slowed production means that North America is now beginning to see goods shortages that will continue as COVID19 takes its toll on that nation.
Chinese manufacturing has been a drug that the world is dependent upon. Low labour costs and fast high-volume production have been the draw. We use more products that are made in China than any other country in the world.
Shortages in goods from China will have an enormous impact on individuals, but an even greater impact on businesses.Tweet
Goods and production shortages have an immediate impact on small businesses that generally maintain low inventory and have reduced resources. These businesses are therefore unable to sustain an amplified downturn. To reduce costs and try to save themselves these businesses have no other option but to begin reducing staff, and the ripple effect begins. Big businesses will not be far behind.
Restructures and Reforecasts
Apple and Starbucks were one of the first corporations to make decisions to temporarily close their retail outlets in China’s Hubei province, the epicentre of the outbreak. The economic impact of that decision became visible two days ago when Apple in a letter to investors stated, “We do not expect to meet the revenue guidance we provided for the March quarter” thus invalidating their previous forecast. Apples woes are two-fold. One due to shuttered retail and the second due to a broken supply chain due to the outbreak.
In recent news Wayfair, an online home goods retailer that employs approximately 17,000 people, has laid out a plan to cut 3% of its workforce. The company is headquartered in Boston, and has been seeing losses, but a large percentage of Wayfair’s goods are made in China. It may seem speculative, however with slowed production in China, companies like Wayfair are at the whims of the Coronavirus economic fallout. This is just the beginning of restructures and bankruptcies of large and small businesses. Governments may be able to manage the stock market, but they will do nothing to save small businesses, where the real story is apparent.
Debt Defaults and Asset Sell-Off by China
As the Chinese economy begins to slip, debt defaults will become a problem and will ripple across the world. Though China can sustain a weak economy for longer than most countries, a protracted epidemic or pandemic is likely to result in economic collapse.
The Chinese are heavily invested in foreign assets. According to China’s commerce ministry, Outbound FDI (Foreign Direct Investment) in 2019 was at $110.6 Billion USD. Regardless of the 8.2% decline from prior year FDI, $110 billion of investment in foreign assets is considerable.
Some of these assets include considerable real estate holdings in the United States and Canada. As China’s economy slides due to the Coronavirus outbreak, the country will begin to sell off these assets setting off a real estate decline here. And the ripple continues.
The impact on the world economy due to currently muted travel and tourism is also enormous and one I will write about in a future post. This one is long enough. Thank you for reading this far.
Recession or Depression
There is absolutely no doubt that the world will slip into a recession due to the COVID19 outbreak. Can it be a catalyst for the Great Depression of the 2020’s remains to be seen based on the spread of the virus, the global response to it, and decisions made by our leaders. Is an economic depression possible? Absolutely. It all depends on timing, if we are currently working with the truth, and if there is collaborative information sharing.
Given accurate data, we can make better predictions and therefore better decisions, and therefore better prepare for the fallout. Poor data based on lies, politics, and fear will only serve to hurt us all and elongate the global problem we face together. This is not a time for borders and individuality. It is a time for information sharing, collaborative work, and strength in unity. It is the only way we can prepare wisely and overcome our global problems.
These are my 2 cents. Give me yours in the comments below. Do you think we should be preparing for a great depression?
Here’s my latest analysis (April 27, 2020) on the economic outlook due to COVID19