Coronavirus Confronts Global Economy With Tough Recovery
Date: Wednesday, March 11, 2020
Source: The Wall Street Journal
Companies are dealing with both a shock to their supply chains and weaker demand from rattled consumers
Businesses are bracing for a longer and steeper coronavirus-triggered downturn than the single-quarter event initially anticipated.
The regions hit by the coronavirus are experiencing a double whammy. Business operations across Asia, Europe and the U.S. are being disrupted by factory closures, quarantined workers and shortages of components, crimping the availability of goods and services—a so-called supply shock. Meanwhile, postponed public events and mounting fear are causing consumers and businesses to hold back, avoiding travel, restaurants and lavish purchases, even where restrictions haven’t been imposed—a demand shock.
The combined effects risk pushing the global economy into a self-reinforcing, downward spiral—a possibility fueling market turmoil and prompting many executives around the world to prepare for darker scenarios than before.
Ohio-based retailer Abercrombie & Fitch Co. is preparing for the coronavirus to affect business for six months, according to its chief financial officer, Scott D. Lipesky. “We operate in 20 countries around the world, and each of them is seeing some level of impact,” he recently told investors.
Likewise, Kevin M. Fogarty, president of Houston polymer maker Kraton Corp., told investors he sees growing concern from the spread of the virus, “with potential for the disruption and the duration to linger well into the second quarter or beyond.”
Moody’s on Monday cut its expectations of 2020 growth in the U.S. to 1.5% from 1.7%, in China to 4.8% from 5.2%, and in the Group of 20 economies to 2.1% from 2.4%. Moody’s Vice President Madhavi Bokil said, “a sustained pullback in consumption, coupled with extended closures of businesses, would hurt earnings, drive layoffs and weigh on sentiment.” He added, “such conditions could ultimately feed self-sustaining recessionary dynamics.”
Economists aren’t forecasting a drawn-out global recession. They expect growth to rebound later this year once the epidemic is brought under control, but that could change if the virus continues to spread.
The outlook hinges hugely on China, where the epidemic began. The world’s second-largest economy looks likely to avoid a recession yet spread enough pain to cause widespread damage. Some business leaders are warning it could be late 2020 before operations normalize.
China’s exports plunged 17% and imports fell 4% in the combined January-February period as activity at its ports and factories slowed to a crawl due to both the coronavirus and Lunar New Year. But while businesses may get back to work this month, global demand for Chinese goods could fall if the epidemic waylays other countries.
“I think people don’t appreciate the level of disruption that China can have on all of our throughput,” Gregory E. Zimmerman, executive vice president of EPR Properties, a Kansas City investor in theaters, ski hills and restaurant real estate, told investors last week. He said he now expects a U.S. recession this year.
Many businesses and economists initially expected the epidemic would track the same temporary dip and rebound seen in 2003 during the outbreak of severe acute respiratory syndrome. Now—with all of Italy under quarantine and the numbers of infection cases rising in the U.S. and other major economies—that is looking optimistic.
Suspension of travel is hitting airlines worse than the 2001 terrorist attacks, with ripple effects not only for hotels, restaurants and theaters but also the oil sector. American Airlines Group Inc. and Delta Air Lines Inc. both said Tuesday they planned to cut flights and ground planes after a drop in booking.
Though it has been a month since China officially returned to work, a host of indicators from electricity usage to ridership on public transportation suggest activity remains far below normal for this time of the year.
China already faced challenges heading into 2020: the lowest growth rate in 30 years, debt that tripled in a decade, record numbers of bank collapses, bond defaults and bankruptcies, a doubling of some meat prices and such limited confidence in its currency and stocks that government rules control how both can be sold.
China last recorded recession the year Mao Zedong died, in 1976, according to the World Bank. But the economy grew an average 9.4% a year afterward, including 15 years of double-digit growth and an average 6.6% since 2015. China’s economy has powered about 40% of global gross domestic product growth in recent years, according to the Organization for Economic Cooperation and Development.
Australia-based Freedom Foods Group Ltd. counts on China for 15% of its sales and the suppliers of its packaging do some of their sourcing in the country. “Quite frankly, it’s a very unreliable place at the moment in China,” Chief Executive Rory J.F. Macleod told investors, expressing hope that things return to normal by the fourth quarter.
Other parts of the world faced vulnerabilities going into 2020, too. For eurozone economies, it was weak growth as the automobile industry struggled with a cooling market and the costs of developing a new generation of electric cars.
Europe relies heavily on exports of goods and services, which are worth almost 50% of its GDP, compared with just 12% for the U.S. A deep European recession could be triggered by prolonged weakness in its two main trading partners, China and the U.S., according to Sylvain Broyer, chief European economist at S&P Global Ratings.
Continental AG , a large German auto supplier, said Thursday it would step up cost-cutting measures because of the coronavirus, which could mean more layoffs and plant closures. The company operates around 50 factories and research facilities in China, and its supply chains have been hit hard by the disruptions.
The U.S. economy has been a bright spot in the global picture. Growth was on a solid footing, albeit slowing, before the coronavirus hit, and the unemployment rate was at a 50-year low of 3.5% in February. Its resilience in the months ahead will depend chiefly on the consumer.
If the U.S. economy is thrown off course this year, “it’s not necessarily because of vulnerabilities that were there and waiting to be exploited, it’s an all new situation,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “It’s going to be consumer-driven, people staying at home, not traveling and not spending.”
Many American businesses had a difficult 2019 amid uncertainty surrounding the trade war with China. Business investment declined in the final three quarters of 2019.
Companies’ bottom lines have also been hurting. U.S. corporate profits fell in the third quarter, the last quarter for which Commerce Department data is available. If company profits are weak in 2020, economists say firms could respond by slowing hiring or cutting jobs, and pulling back further on investment.
Foreign direct investment globally is likely to shrink 5% to 15% this year, the United Nations Conference on Trade and Development forecast following what it said was an average 9% downward revision in revenue expectations for 2020 by the world’s biggest companies.
The epidemic is “going to dampen most of this year,” David Farr, chief executive of Emerson Electric Co. said, adding that the St. Louis-based maker of industrial products expects a rebound next year.
Mr. Farr initially expected a short-term slowdown followed by a quick recovery, but after watching governments struggle to deal with the virus threat, he now believes it will be a more drawn-out period of sluggish demand.
“I think it’s going to be weaker than we thought,” he said, “and then it’s going to come back faster than I thought.”