While the coronavirus disease (Covid-19) continues to spread across the globe, with 88 948 cases and 3 043 deaths confirmed by the World Health Organisation on March 2, its economic effect is also circling the world. This started with the slowdown of the Chinese economy and has now begun to escalate.
On Monday, the Organisation for Economic Co-operation and Development (OECD) announced that it is downgrading its 2020 global growth forecast from 2.9% to 2.4%, citing output contractions in China as the reason.
The virus, which causes flu-like symptoms, emerged in Wuhan in Hubei province in China and has since spread to 64 other countries.
China has put strict measures in place to try to stop the virus from spreading such as quarantines, restrictions on labour mobility, cutbacks in many service sector activities and travel, all of which have caused slow production.
The OECD has revised China’s growth forecast for the year to below 5%, before recovering to about 6% in 2021, as output returns gradually to the levels projected before the virus outbreak.
“The adverse impact on confidence, financial markets, the travel sector and disruption to supply chains contributes to the downward revisions in all G20 economies in 2020, particularly ones strongly interconnected to China, such as Japan, Korea and Australia,” said the OECD.
Nicky Weimar, a Nedbank senior economist, said the Oxford Economics consultancy estimates that Covid-19 could cost the world economy $1-trillion in lost income in 2020, knocking about 1.3% off global growth.
South Africa, which is also part of the G20, has seen the rand depreciate by 10% since the beginning of 2020 as investors dump their JSE assets in favour of safe havens such as gold.
“Externally, the coronavirus outbreak, China growth concerns and general risk aversion have punished the rand,” said Lukman Otunuga, a senior research analyst at FXTM. He added that South Africa’s other domestic problems, such as the debt-burdened electricity utility Eskom and load-shedding, have also affected its general economic outlook.
The JSE has dropped by 13.85% since January.
China is South Africa’s biggest trading partner. Last year, 12.1% of the country’s exports went to China, of which the bulk of the goods were commodities.
Nedbank’s Weimar said South Africa is heavily exposed to China in terms of its mining and manufacturing industry. She said the most affected sector will be the mining industry, because there is less demand for commodities globally except for gold.
On Tuesday, gold was up 0.8% at $1 602.85 an ounce.
The country’s manufacturing sector is integrated into the Chinese supply-chain, said Weimar, and disruptions to Chinese production will therefore affect local manufacturers’ ability to source key components to maintain their production, which will affect the vehicle, electronics and machinery and equipment industries.
Industries are not the only ones feeling the pinch. Last week local companies Woolworths and Shoprite expressed concerns about the virus’s effect on their imports from China.
In an email response to the Mail & Guardian, Woolworths said although it has not seen any immediate direct effect on their South African business, it anticipates a delay in stock availability in certain clothing categories.
Business Insider reported on February 27 that Shoprite is at risk of losing R100-million in sales, because low production in China could disrupt the import of winter products such as heaters and electric blankets.
Weimar said factors such as local companies not receiving components for manufacturing from China, the country exporting less commodities and load-shedding will result in a weak gross domestic product for the first quarter of 2020.
On Friday, the department of health confirmed that it will repatriate 151 people from Wuhan in the next seven to nine days. The department said the group is not affected by the virus, but they will be quarantined for 21 days before they are exposed to other people.
The Mail & Guardian reported on February 27 that the evacuation and subsequent quarantine is estimated to cost R80-million.
There have also been reports that central banks will lower interest rates to mitigate the effects of the virus. So far, Australia has lowered its interest rate by 25 basis points to a new record low of 0.50%.
But Otunuga said it remains to be seen whether this will be enough to stabilise conditions given how the virus outbreak is a health crisis that causes major supply-side shocks.
Tshegofatso Mathe is an Adamela Trust business reporter at the M&G