Covid-19 and the Global Economy

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By Dr Emma Gardner
Department of Strategy and  International Business, University of Birmingham

Since the outbreak of Covid-19, approximately 89,000 people have been infected worldwide, and to date over 3,000 people have died. The virus, which is thought to have originated in Wuhan, has taken hold in China, with over 78,000 known cases of infection. However, it is quickly spreading, with cases now confirmed in over 50 countries. With no specific treatment yet developed for the coronavirus and authorities recommending, or in cases, imposing isolation in suspected cases, there are economic consequences unfolding as people react to Covid-19, or seek to minimise their chances of infection.

In China, Apple took the step of closing its 42 physical stores during the first week of February, while Burberry closed 24 of its 64 stores, with those that remained open trading on a reduced schedule. These moves reflect the decisions of Chinese province authorities to delay return-to-work dates post Chinese New Year to control the spread of the virus, although most work has now resumed. Closing stores in this way is a two-sided issue. On the one hand, if customers are being quarantined, or choosing to self-isolate as a preventative measure, the footfall in stores would be greatly reduced and therefore fewer sales would have been made. On the other hand, stores may have no choice but to close if their workers are unwilling, or unable to work.

Despite the majority of coronavirus cases being clustered in China, the nature of our globalised world is resulting in cross-border implications. Chinese firms play an important role in global production networks, thus any impact on the Chinese labour force can have a domino effect in other countries. It has been reported that The China Council for the Promotion of International Trade has handed out over 3,000 force majeure certificates, which provide Chinese firms with legal exemptions from fulfilling their contractual obligations to their global customers, such as delivering finished goods. In 2018, China was the fourth largest importer into the UK behind the US, Germany and the Netherlands, with £44.7 billion worth of goods and services imported. The majority of these goods were classified as telecoms and sound recording equipment or miscellaneous manufactured articles, the latter category incorporating toys, sports equipment and plastic items, which when combined accounted for over 25% of all goods imports from China, with a value of over £11 billion.

However, although Chinese firms produce products for the end-customer, factories also work within complex supply chains where they may occupy intermediate positions; the disruption caused by factory closures in China can therefore easily cascade into other firms in other regions, and in turn effect local economies within those areas. The aforementioned imports may provide valuable inputs into UK production processes. The effects of coronavirus could therefore halt UK production lines if supplies dry up, and affect local labour market dynamics, particularly for those individuals who are employed on zero hour contracts as if production is compromised, then firms will have less work to offer their casual staff.

Coronavirus cases are also on the rise in the UK, meaning that the measures taken in China may be adopted closer to home to contain the spread of infection; in fact, the Chief Medical Officer warned on Friday that schools might face two-month closures. If this is the case, businesses will be affected as parents struggle to source childcare. It has also been reported that FTSE 100 share prices have lost £210 billion in value because of coronavirus. While there are only a few cases currently in the UK, the spread of coronavirus outside of China is increasing and thus presents worrying consequences not only for people’s health, but also for local economies. Given that there is no cure for the Covid-19, it is impossible to know how long disruption may last and how the situation may unfold, so while some Chinese factories may be back to work, their global customers and suppliers may be the next to shut down.

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