Written by Russel Beron July, 2020
Global Economic Impact
While the coronavirus has impacted some countries more than others, global supply chains have been disrupted, demand for goods and services has plummeted, tourism and business travel has declined, stock markets and commodity prices have plunged, and unemployment has hit record levels. JP Morgan estimates that the world economy has contracted by 12% from January to March, with equities falling an equivalent level to Great Depression, and oil prices diving by 60% in Q1.
While the global economy and stock markets began to recover in April, many businesses expect to see growth for the remainder of 2020, but many businesses are less optimistic. Retail has been hit hard with numerous store closures and bankruptcies of long-established brands. Unemployment in North America and Europe has also reached record levels especially in the US where the virus remains un-contained.
The difference with past epidemics such as SARS in 2003, or the 2008 Financial Crisis is that now the global economy is much more interconnected, with China playing a significantly larger role in global trade than it did 10 years ago. In 2019, China contributed 17-20% of Global GDP and produced most of the world’s components, intermediate and finished goods. This enlarges the economic fallout for other countries, severely impacting global growth in 2020. With travel restrictions likely to persist, the large spending on Chinese and other tourism will dry up, impacting those countries where tourism is a substantial part of the economy. To survive the pandemic and economic fallout, companies will likely play safe, holding back on investment and hiring, forcing consumers to moderate their spending, further limiting economic growth.
Even prior to the global pandemic, overall economic growth had slowed, with emerging markets and China seeing low single-digit growth compared to the robust prior decade. Optimistic current projections are that global growth will slow to between 1.5% – 2.4% in 2020 (from 2.9% in 2019), depending on how fast the virus can be contained, reaching 3.25% in 2021. Most countries are implementing economic stimulus measures, including wage supports, subsidies/loans for businesses, and lowering interest rates to record levels. The trade war between the US and China also negatively impacted global trade and investment. While a resolution was in the works prior to the pandemic, it is unlikely that the US and China will meet trade targets.
Opportunities for mitigating the fallout of the pandemic include the US and China further reducing tariffs, easing of tension between the US and Europe, settling the UK and the EU’s Brexit concerns, and greater government intervention to support liquidity and consumer demand. With interest rates down to 10-year lows, the US implemented a $2 trillion fiscal expansion package which includes a $500 billion bailout fund to support hard-hit industries. The EU, China, and other countries have taken similar steps to prop up their economies, but it is unlikely to be enough to pull the global economy out of recession quickly. While it is difficult to predict global growth prospects at this point, projections are tending towards a worst-case scenario, in which the virus is contained by late 2020, with a vaccine developed in early to mid-2021, followed by an economic recovery through 2021.
Impact on Global Supply Chains
The pandemic has been a true test for global supply chains, with stockpiling and sudden drops in demand making forecasting difficult. Freight transportation, warehousing, and fulfillment have all been challenged by labor shortages, lock-downs, and variability in demand. For example, the US faced a supply glut of oil in Q1 due to reduced demand and inadequate storage. Shortages of workers was another issue, even for essential logistics services, making it difficult to move container freight and clear customs, creating bottlenecks and increasing logistics costs.
A prolonged delay in getting China’s manufacturing up to speed will add to weakness in the manufacturing sectors of many countries who rely on China for intermediate and finished goods. Supplier Management Software allows for companies to maneuver and communicate with their suppliers to ensure that product timelines are still met. The impact of suspending production around the globe affects suppliers, downstream partners, and logistics businesses. Daegu, a key manufacturing center in South Korea has shut down much of its production, including Samsung Electronics, and LG. Lombardy, the Italian region hit hard by the virus and mostly shut down, is Italy’s industrial center, representing 40% of the country’s GDP. While China’s production is back up to speed, reduced global demand due to shutdowns has resulted in significantly lower orders.
All these issues and more are covered in the CBX Sourcing Report. To learn more about how to address some of these issues with the CBX platform, feel free to contact us directly.