In a recent interview with CNBC-TV18, chief India economist at JPMorgan-Sajjid Chinoy- said that the global economic growth may fall as much as 1 percent in the current market situation.
“With every passing 24 hours, we are figuring out that the economic damage around the world is going to be much more severe than people believe,” he said.
Chinoy pointed out that the world is seeing three unprecedented shocks play at the same time- supply shock from china, oil supply shock and coronavirus. Furthering his recognition of the problems, here’s why the three problems playing out simultaneously will affect the global economy that was only recently recovering from the ill-effects of US-China trade war.
China is critical to businesses around the globe. While the country started as a hub for cheap labour, over time, with tax breaks offered by its government to companies that produced components in the mainland and progress in its economy, it became inevitable for China to not become a part of a company’s supply chain.
Globalisation has made supply chain systems complex. For example, parts of a computer will be manufactured in Taiwan and travel to China to be assembled with chips made in South Korea or Japan and sold to consumers in Europe or the US. Even pharmaceutical products manufactured in India, for export to the US, are highly dependent on China for its raw material supplies.
On the other hand, China is also a major market for many big names. In recent quarters, its large population of high net worth individuals have driven profits for luxury brands like the French Louis Vuitton.
The COVID-19 outbreak has been especially severe in China with over 3,000 deaths. The government mandated shutdowns to curb the spread of infection have caused sharp decline in economic activity. The country’s factories recorded their worst month on record in February as they struggled to re-open or hire due to travel restrictions.
While the first quarter of 2020 is definitely going to significantly damage China’s economic growth, it will also affect most global companies with China as part of their supplychain.
The country that contributed over 15 percent to the world’s GDP is going to undoubtedly impact economic growth.
Stock prices have been free-falling after a surge in reported cases of COVID-19 infections outside China. The virus has become a health hazard and caused governments and organisations around the globe to take strict measures to restrict movement. Obvious panic over the spread has caused more harm than the disease itself.
It is going to affect sales for businesses associated with travel, tourism, entertainment, restaurants and even manufacturing. In Italy, complete closure of all stores except groceries and pharmacies was ordered till 25 March. As more governments impose such restrictions as a precautionary measure to safeguard its residents, consumption levels will sink, causing a slow down in economic growth.
The main concern surrounding coronavirus is the uncertainty it holds. With no cure and vaccination in place, there is no saying when the misery will end.
3. Oil prices
Last week, post the meeting between OPEC and its allies (also known as OPEC+), Russia rejected Saudi Arabia’s recommendation to make additional production cuts of 1.5 million barrels per day starting 1 April, that would extend till the end of the year.
With no conclusion on making additional production cuts, it was decided that the oil-producing countries would continue monitoring the situation on demand.
On failure to strike a deal with its allies, Saudi Arabia on Saturday announced aggressive discounts to its official selling prices for April and according to a Reuters report, the kingdom is preparing to increase its production above the 10 million barrel per day mark from the current 9.6 million level.
The discounts and increased production have raised the potential of an oil-price war which is especially concerning at a time when demand for fuel has already fallen significantly due to low economic activity in China, the biggest importer and travel restrictions around the world.
Economists are worried that low oil prices will put financial and social pressure on major crude producing nations such as Iraq, Angola and Nigeria. It will also hurt Gulf nations and large oil companies.
Even if demand were to recover after the coronavirus spread is contained, government policies, that are pushing energy alternatives to cut greenhouse gas emissions, will decelerate growth in consumption.
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