Despite all measures taken to prevent further spread, more and more countries are reporting that the corona virus has been found. It is not surprising that the virus thus further fuels fears of major economic damage. Is that fear justified?
The economic damage occurs through two channels. Due to store closures and travel bans in large parts of China, consumers are staying at home. This also affects Western companies that sell a lot in China. Germany is an example.
The other channel runs through production. Many companies in the West, such as car factories in Germany, no longer store production parts on a large scale in their own department stores. They come from different countries, exactly when they are needed. That is why we talk about Just-in-Time production process. China is almost always one of the most important countries where parts come from. Due to restrictions and the fact that many factories in China have not been open for a while, this supply process has been disrupted.
Sailed before breaking out
Companies usually have parts in stock for a few weeks, but not longer. Parts are usually brought to Europe from China by ship. Many ships sailed before the outbreak of the virus, meaning parts shortages could occur in the coming months.
Because China is the epicenter of the outbreak, the economic consequences are expected to be greatest there. In the West, the effect can also be expected in the first half of the year. Because economic growth was already slowing down before the outbreak of the coronavirus, this could lead to a temporary contraction in some countries. This includes Italy, France and Germany.
Temporary negative effect
However, there is a good chance that the negative effect on growth will be temporary. The virus outbreak eventually stops. The comparison with the SARS virus in 2003 is obvious. Even then, there was a temporary negative effect on growth and on the financial markets, but after a few months both improved sharply again.
The Chinese government will take even more growth-promoting measures, because more is at stake than just economic growth. SMEs are having a hard time. They account for more than 80 percent of all jobs. If many companies collapse there, this will lead to rising unemployment, after which social unrest lurks. Many SMEs can only survive for a few months at most and the government in Beijing knows this all too well.
Catching up drives growth
The production process in China is now slowly normalizing. More and more companies are opening their doors. Several surveys show that Chinese consumers plan to catch up on their spending in the near future. What the economy loses in the first months of this year may well be made up for in the rest of the year. The same applies to production that has come to a standstill. This catch-up drives growth.
Moreover, a favorable growth effect can be expected. The negative effect on growth may prompt governments in Europe to stimulate the economy through looser fiscal policies. In Hong Kong this happens in a completely new way: all adults receive more than 1.000 euros to spend once.
What will make a difference for Europe is if Germany does the same in some form or another. The coronavirus could be the final push for the government in Berlin to take more decisive action. The outbreak of the coronavirus does not necessarily have to mean a recession.