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The Financial Express

Economic fallouts of coronavirus and global supply chain  

Abdullah A Dewan     | Published: March 21, 2020 20:52:42 | Updated: March 31, 2020 22:34:23


Economic fallouts of coronavirus and global supply chain   

It is now widely known that COVID-19 has created a disease pandemic, a fear contagion, decimating the stock market everywhere, creating -- what some people started calling -- "an economic pandemic". To deescalate its spread extraordinary measures are undertaken and more are underway -- never seen before.

The US economy and peoples' confidence in the economy in general are centered around the performance of the stock market -- globally known as the Wall Street. That confidence has seriously been shattered by last few weeks of COVID-19 inflicted market mayhem. The virus eruption has already sent global stock markets into a tailspin. The S&P 500 and Dow are trading in bear market territory, and now roaming around 30 per cent below their all-time highs from just a month ago. "When people don't know how to quantify things, which is really where we're at right now, the first reaction in the market is to sell first and figure things out a bit later," said J.J. Kinahan, chief market strategist at TD Ameritrade.

Warning bells are ringing loud everywhere alarming that the disruption in production of goods and services caused by China centric supply chain could steer the global economy into a dire financial and economic disarray with stagflation - a phenomenon characterised by simultaneous incidence of recession and inflation

Bank of America (BOA) warned investors on March 19 that "We are officially declaring that the economy has fallen into a recession, joining the rest of the world, and it is a deep plunge," BOA economist Michelle Meyer wrote in a note. He further added, "Jobs will be lost; wealth will be destroyed, and confidence depressed."

BOA anticipates that the US economy will "collapse" in the second quarter, shrinking by 12 per cent. GDP for the full year will contract by 0.8 per cent, unemployment rate will nearly double with roughly I million jobs lost each month of the second quarter for a total of 3.5 million. According to BOA's labour market prognosis, "the unemployment rate is likely to jump nearly double, with roughly 1 million jobs lost each month of the second quarter for a total of 3.5 million.".

Appearing on CNBC's Halftime Report (March 18, 12:54 pm), billionaire Bill Ackman -- CEO of Pershing Square Capital -- painted a stunning doomsday portrait of how the US economy will soon look without drastic action. "Hell is coming," Ackman said, with his voice breaking. He added, "This is a feeling like I've never had. Like there's a tsunami coming. We need to shut it [the US government] now." America will end as we know it unless we take this option." He stressed during the 28 minutes long interview, which I happened to watch live.

Even if the virus eruption curve is flattened and inverted over the next few weeks, it will still leave its long-term imprints and impact on people and the economy. EU and other countries are already in a recession zone. China and the US cannot escape the recession primarily because of the extent of interdependence of the two economies. As for the Chinese economy,  the demand and supply shocks could combine to drive the country into stagflation. This duel debacle is highly likely to happen in China than in the US because China is already experiencing inflation over 5 per cent while inflation is nowhere to find in the US

Some people think that globalisation has escalated the spread of COVID-19 from China to the rest of the world.  That's a boneheaded thinking - to say the least. There is no evidence that the virus took free rides on Chinese exports and then spread elsewhere to turn into a pandemic. The virus flew across Chinese border with infected people. However, the adverse economic fallout can be ascribed to China centric supply chain. As the virus crippled factories by quarantining workers in China, locking down cities, suspending air transportation of parts and manufacturing supplies, the manufacturing sectors took a big hit. The US, EU and other China-supply chain-dependent countries are left helpless, causing a slowing down or even stopping production in some sectors in these countries.

In 2018, China was credited for 28 per cent of global manufacturing output. By all accounts, that is an underestimate, given that China specialises in mid to low-cost manufacturing. Another basis of elevating China's importance is that "China's share of the world's manufacturing output accounts for more than its next two competitors combined -- the US at 16.6 per ncent and Japan at 7.2 per cent" (The Wall Street Journal).

The supply chain disruptions are now being analysed and assessed by companies and governments around the world if their dependency on Chinese manufacturing and supply chain can be diversified to other locations away from China. It seems very likely that rival countries would develop supply hubs of closely linked manufacturers of the kind that China has achieved a stunning success.

No one anticipated that an epidemic contagion could derail both supply and demand channels globally. However, the fallout could be instructive for the global community that the manufacturing supply chain may not be so lopsidedly located in a single country like China or a region. Country or region centric outsourcing for cost savings have now delivered the world with debilitating manufacturing disruption and caused holdups everyone from South Korean car manufacturers like Hyundai and Kia, American General Motors, Tesla, Apple and so on to small tech companies.

This time it is corona virus, next time it could be a natural disaster like a tsunami, devastating and destroying everything on its path. COVID-19, at least, left the factors of production (land, labour, factories, and the infrastructure) intact, standing ready to run again, the tsunami will not be that gracious. 

In the US, the ripple effects from the spread of the disease has been a serious setback to credit markets also. The short-term fund raising by selling commercial papers by big businesses has come to a near standstill. The Federal Reserve assured that it would provide funds to companies struggling with short-term funding and even provide special credit facility to purchase commercial paper from issuers that have been having a hard time finding buyers in the open market. Treasury Secretary Steven Mnuchin is working with the Congress for a $1.00 trillion stimulus package. Earlier, the Fed slashed its benchmark interest rate by 1 per cent from 1.25 per cent to near zero rate (0 - 0.25 per cent). Quantitative easing with $750 billion target - one that many believe had resuscitated the economy during the 2008 Great recession - is back again 

Aggressive government efforts to deescalate, flatten and then invert the coronavirus curve to an eventual elimination has delivered a punch to the US economy by creating a crunch in credit markets, threatening to turn a disease contagion into a financial contagion and a deep recession.

Businesses are frantically raising cash by exhausting down their lines of credit and resorting to other borrowing outlets, as they face an unexpected shortfall in revenues, driven by slowdown in business activities. Generally, a financial crisis is triggered when firms get into liquidity distress and fail to generate cash. That's why, the Fed is actively trying to flood the credit market with liquidity while making it easier for banks to borrow at the FED's discount window (FED playing the role of the lender of last resort). The Fed is standing ready to use all its tools to thwart the disease pandemic turning into a financial fiasco.

Finally, by decimating the global stock market in general and the Wall Street in particular, COVID-19 has crippled many Americans financially and psychologically - especially those who are tiptoeing into their preplanned retirement age. The extent of the ruin of their retirement portfolio depends on how long it takes for the market to bounce back. That will largely depend on how long this atrocious killer, in the absence of any deterrent vaccine, keep infecting and killing people while leaving its catastrophic imprints on the economy.

California Governor predicts that 25.5 million residents (56 per cent of California state population) are likely to be infected by the virus. There is no way to tell who will be spared from the onslaught of the virus. Echoing Ackman, I would say that the Hell is here, there, and everywhere, crippling people with fear in over 160 countries and in the US in all 50 states and territories. The fear is simply all out paralysing - to say the least.

Abdullah A Dewan, formerly a physicist and a nuclear engineer at Bangladesh Atomic Energy Commission (BAEC), is professor of Economics at Eastern Michigan University, USA.

adewan@emich.edu.

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