• July 27, 2020

How Economic Growth is Being Struck by COVID

  • By Mark Hudson

 

Written by Russel Beron July, 2020

 

Impact on China

While China appears to have had a milder case of the coronavirus, the financial consequences will be harder to avoid. China’s outbreak reached its height during the Chinese New Year in February, which led to an extended shutdown of most of the country. This delayed delivery of orders into Q2. So Instead of accepting delivery or placing new orders, businesses in Europe, North America, and elsewhere are stalling or cancelling orders, extending the impact to Q3 and beyond.

In the past 5-10 years, China has relied heavily on domestic consumption and emerging markets to maintain economic growth, but the pandemic is putting a damper on these plans. Even as China is mostly back to work, factories are operating well below capacity as export demand continues to suffer and Chinese consumers have tightened spending. With China’s economy contracting in the first quarter for the first time since 1976, the remainder of 2020 is going to be unfamiliar territory for China. Forecasts for China’s GDP growth in 2020 were revised to 4-5% which still seems optimistic until the virus is contained at a global level.

According to the Chinese Government, by late March, most of China’s larger factories and around 75% of smaller businesses were up and running, with 90% of workers back to work. However, reports show that logistics bottlenecks and subdued demand are an issue. Trucking capacity remains inadequate as workers face quarantine challenges, resulting in freight and clearance delays on imports and exports. To support the economy, he Chinese State Council has reduced or exempted employer contributions to pension, unemployment, and work injury insurance for 3-5 months, saving employers 10-15% in payouts. They also announced infrastructure projects worth over US$7 trillion, beginning in 2020 and are reducing import tariffs and handing out vouchers to encourage domestic consumption.

Impact on Developing Countries

Developing countries are feeling a heavy impact from the Coronavirus, which could worsen as the global economy falters. Initially, some countries benefited from the China shut down by picking up orders, but that changed when the virus hit. Low-cost sourcing locations such as Bangladesh, Cambodia, India, Turkey, and Eastern Europe are seeing widespread factory shutdowns, with cancelled orders, limited raw material inputs, and large unemployment. Countries in Africa and Asia that rely on oil, commodities, and finished good exports will suffer more than developed countries given they are still operating on low minimum wages with few financial reserves, weak healthcare, and insufficient funds to prop up their economies.

Emerging economies such as Brazil and India are only now reaching the peak in virus cases which threatens to reverse progress made in previous years. Emerging markets are also more exposed due to weaker healthcare systems and a broader informal economy which may not benefit from stimulus.

The reality of global supply chains is that countries are interdependent in their production of goods and with most of the world relying on China in some way, their fates are tied together. For example India, the biggest manufacturer of generic medicines, imports over half its active pharmaceutical ingredients and is heavily dependent on China for raw materials and manufacturing inputs. While the pandemic continues, it will be hard to maintain export numbers which could lead to a global shortage of medicine and other products. While the EU and the US have looked at India as a viable sourcing alternative for textiles, homeware, ceramic goods, furniture and other products, India’s supply chain and regulatory ecosystem does not match China’s.

Some see opportunity in this crisis, to collaborate more closely by reducing trade barriers and tariffs and retooling factories to diversify production, but the reality is that the coronavirus is more like a once in a century event, that only time will repair. Once the crisis lifts, it will be important for policy makers to implement reforms that will quickly drive economic growth and address the more basic food and healthcare needs of less privileged populations.

All these issues and more are covered in the most recent CBX Q2 2020 Sourcing Report. To learn more about how to address some of these issues with the CBX platform, feel free to contact us directly.

 

Written by Russel Beron July, 2020

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