As the human costs in China and other countries continue to rise, the virus is also taking its toll on different industrial sectors – and subdued demand and disrupted supply across industries increase uncertainty over the global economy.
Lurking behind the daily gyrations of the stock market is a deeper story about the threat coronavirus carries to the global economy — a story that Congress needs to understand and act on now to stave off a potentially devastating recession.
There are economic problems caused by Covid-19 illness itself, like closed Chinese factories making components unavailable to other parts of the supply chain. But there’s a separate threat to the global economy. It’s an issue of demand, which can cause ripple effects that would potentially outlast direct disruption of the economy.
A global pandemic sounds deceptively like a supply-side problem: China shut down a bunch of factories to halt the spread of infection, and now there’s no hand sanitizer to be had and Apple products are back-ordered.
But that’s not all that’s happening. We’re looking at what a college econ textbook would call a shock to the demand side of the economy on top of the supply-side disruptions.
A demand shock is something like what started to happen when American house prices began to slide downward in 2007 and 2008. Because prices were declining, investors get less interested in building new houses. And because prices were declining, homeowners felt poorer and became less likely to make major purchases.
Either kind of shock can lead to a stock market decline. If Apple can’t sell iPhones because nobody wants to buy them (demand problem), that’s bad for its share price. If Apple can’t sell iPhones because the factory where they’re assembled is closed (supply problem), that’s also bad for its share price.
But it’s important to distinguish a supply shock from a demand shock because the solutions are different.
Start with airlines. Currently, executives are warning that the slowdown in global travel demand they are experiencing could be worse than 9/11 and airlines all over the world are cutting flights as fewer people want to fly. That’s going to reduce orders for new aircraft and hurt manufacturing in the United States, Europe, Canada, and Brazil, where airplanes are made.
Fewer flights mean fewer people in airports. Fewer people in airports means reduced hours and tips for people who work in airport retail. If the typical airport retail worker were sitting on a fat savings account, they could dismiss the hit to their income as temporary and probably take advantage of some discounts. But we know that most working-class people, even in a very rich country like the United States, more or less live paycheck to paycheck (they are “liquidity constrained” in economics jargon) and can’t actually take advantage of any good shopping opportunities unless they have money coming in.
The disruption of supply chains, especially those that pass through Asia, is hurting businesses in multiple dimensions. Countries such as China, South Korea and Japan are critical to the supply chains for products ranging from plastic toys to iPhones to high-tech machinery. In these countries, manufacturers can’t get raw materials delivered reliably, are facing worker shortages and are having difficulty shipping out products. Rejiggering supply chains takes months, if not years. If the coronavirus spreads and causes disruptions to other major economies, it could wreak further havoc on supply chains.
Governments cannot eliminate uncertainty, but they can ensure the transparent and accurate flow of information. Even if the news is bad, consumers, businesses and investors need to know that they have a reliable picture of the facts. That, along with knowing that governments are doing all they can, might be the salve that everyone needs.
If the virus continues to spread across China, East Asia and other world regions, however, uncertainty and disruption will increase. Movement restrictions would continue and supply chains that are currently temporarily disrupted would decompose entirely, and factory shutdowns would inevitably follow, not just in China but also other markets. Some companies might consider revising their supply chains to find alternatives for China, but experience shows that that’s easier said than done.