Corovirus Covid-19: Economic Impact

Dusseldorf The car maker Fiat Chrysler was the first in Europe. The Italian-American manufacturer announced that one of its factories in Serbia is at a standstill due to a lack of deliveries from China. It is the first time that a European company has to stop production because of the corona virus. It seems unlikely that it will be the last time.

Economists rather expect the consequences of the epidemic to become clearly felt for Europe in the next few weeks. The virus affects companies in two ways: Firstly, there is no demand from China because production had to be shut down there and income stagnated. On the other hand, production chains are interrupted because Chinese supplies fail.

“It is as if someone across the country had pressed the pause button,” Fu Ying, chairwoman of the Foreign Affairs Committee at the National People’s Congress of China, described the situation in her home country at the Munich Security Conference. Production is slowly starting up again. But the long-term consequences are likely to result in slower economic growth – in China, Germany and the rest of the world.

Timo Wollmershäuser, head of business at the Munich Ifo Institute, has already announced in an interview with the Handelsblatt that he is lowering his estimate for German economic growth this year because of the virus. If China grew more slowly by one percentage point, it would cost Germany 0.06 percentage points of growth. “This means that the German economy should only grow by a maximum of one percent this year,” said the economist.

Other researchers also warn of the consequences of a continuing corona epidemic. RWI economic analyst Roland Döhrn estimates that Germany will probably not slide into recession just because of the virus. “But there are additional burdens, such as the Brexit and the trade conflict with the United States.” After all, the fourth quarter had turned out to be worse than forecast before Christmas. Döhrn warns: “So the risks are great.”

There is no demand

The declining demand is already making itself felt in the company’s figures. For example, carmaker VW reported an 11 percent decline in Chinese sales in January. And is doing better than the rest of the industry. Because, as can be heard from the Chinese Association of Automobile Manufacturers (CAAM), total auto sales in China fell by 20 percent to 1.6 million vehicles in the month. This is the largest drop since January 2012.

The Chinese Association for Passenger Car Manufacturers (PCA) even estimates that the demand gap will increase to 30 percent by the end of February.

The airlines are also expecting a loss of billions in sales. The International Aviation Association believes that the corona virus could cost the airlines around five billion euros in the first quarter.
In addition, the effects go beyond March. Industry experts therefore expect that the corona virus could hit the airlines more than the Sars outbreak from 2002. At that time, the Iata flight association estimated the damage at ten billion euros.

Daniel Röska from Bernstein Research estimates that around 20 percent of industry sales are “put at risk” by Corona. In Europe, the big three airlines are particularly affected. Here, the expert expects weak demand for six months. Lufthansa and Air France-KLM are most active in the Chinese business, and the British-Spanish airline holding company IAG is not as strong there.

The President of the German Institute for Economic Research (DIW), Marcel Fratzscher, says: “The extent of the spread of the corona virus cannot yet be estimated, but the consequences are likely to be significantly more serious than the Sars outbreak.” The unsettling company, investors, but also consumers. And not just in China.

International events have also been canceled in Europe to protect visitors from infection. The Mobile World Congress in Barcelona is the most prominent example. But the watch company Swatch also canceled its company fair in Zurich, which was to take place at the end of February. Others, such as the confectionery fair in Cologne, the Fruit Logistica in Berlin and the toy fair in Nuremberg, have received numerous cancellations from Chinese exhibitors.

Factories stand still

The consequences can hardly be estimated if the virus spreads over a longer period of time. Because in addition to sales problems, companies are facing increasing difficulties in production worldwide. For example, if there are no important deliveries from Chinese factories that were closed due to the epidemic. Like now at Fiat in Serbia.

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German car manufacturers mainly buy electronics from China. Car manufacturers such as the VW subsidiary Skoda have set up task forces to secure the supply of parts from China for European plants. But complete security can hardly be achieved, says Skoda. Very small suppliers, in particular, who produce a single but important component are difficult to monitor.

Nobody can say how long the supply chain will last, said Jaguar Land Rover boss Ralf Speth at an industry meeting. In addition, the sale of new cars in China has come to a standstill. Speth: “Who is interested in a new car now?” The factory in China is at a standstill.

But China does not only play a central role as a production location for electronic components for car manufacturers. Whether screens, PCs or smartphones: hardly any company that does not manufacture or order parts there. If the factories of manufacturers like BOE and TCL or of contract manufacturers like Pegatron are closed for longer and the travel restrictions for workers remain, this should have a massive impact on production. As the Apple case illustrates.

“Designed in California, made in China”, the company prints on many of its products – which are manufactured by Chinese contract manufacturers such as Foxconn with hundreds of thousands of employees. Apple is directly affected by the epidemic. After all, operations in the two most important factories start up slowly, according to the Reuters news agency. This is reflected in Apple’s numbers. The iPhone manufacturer’s forecast for the current quarter is an unusually large range with sales of $ 63 to $ 67 billion.

CEO Tim Cook cited the reason for the travel restrictions in China. Particularly unfortunate: industry observers expect the group to present a new, affordable model soon – production should start now. Apple did not want to comment on it.

The problem doesn’t just affect Apple. Around 70 percent of all smartphones roll off the assembly line in China. The market researcher Strategy Analytics is therefore concerned that production may collapse by 30 percent in the first quarter and could delay the recovery of the market. The problems in the manufacture of PCs and other devices are likely to be similar. So Nintendo has delivery problems with the Switch console.

Particularly high losses are to be expected in the production of screens: In the province of Hubei, which was particularly hard hit by the outbreak of the virus, manufacturers such as BOE Technology and TCL operate factories for LCD and OLED panels, which have to do with major restrictions. The market researcher IHS Markit expects a decline in production in the short term. The consequences are likely to be felt all over the world, as China produces 55 percent of all displays. IHS Markit expects prices for PC and TV monitors and notebooks to rise.

All eyes on China

Against the background of such individual news, the Federal Ministry of Economics does not yet dare to make a concrete damage forecast for the German economy. The Ministry’s monthly report, published on Friday, says only that the spread of the coronavirus has increased foreign trade risks. Economics Minister Peter Altmaier told the Handelsblatt: “We have long been in close contact with the business associations and the economy concerned.”

He is following developments very closely and will take any necessary steps. It is still too early to quantify the effects, because this depends largely on further developments.

Economists are more direct there. “The corona virus hits the German economy at a very bad moment,” said DIW President Fratzscher. “I expect that economic growth in Germany will develop even more slowly this year than previously thought.”

Jörg Krämer, chief economist at Commerzbank, also sees his forecast of small growth in danger. He assumes that Chinese economic growth in the first quarter will be up to three percentage points lower due to the corona virus. That would dampen German exports considerably. But Krämer also points out that significantly more is likely to be built in Germany due to the mild winter. This should at least partially compensate for the burden on the economy from foreign trade.

And Krämer is again optimistic for the second quarter: “Chinese companies will make up for the production that was lost in the first quarter.” This was shown by corresponding experience with the Sars epidemic.

A current survey by Reuters among 40 economists shows how much uncertainty is still in all forecasts. The range of their forecasts for Chinese economic growth in 2020 ranged from 2.9 to 6.5 percent. “I think the virus will be under control by April,” says Ye Bingnan, an analyst at the Bank of China. “But in the worst case scenario, economic growth could be between two to three percent in the first quarter and only five percent for the year as a whole.”

In any case, the leadership in Beijing is still optimistic about the prospects. Deputy Foreign Minister Qin Gang reaffirmed China’s goal at the Munich Security Conference to achieve economic growth of six percent in 2020. “The impact on the economy is only temporary,” said Qin. The government is trying to counteract this with tax breaks for companies. “We also expect consumer demand and the economy as a whole to recover very quickly after the epidemic ends.”

Assistance: Christof Kerkmann, Dana Heide, Sha Hua, Jens Koenen, Katrin Terpitz, Corinna Nohn, Thomas Sigmund, Torsten Riecke, Stefan Menzel

More: Economist Felbermayr on the consequences of the corona virus: “Greater damage every day”.

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