To assess the possible impact of the coronavirus on the economy, it is important not only to focus on the epidemiological profile of the virus but also on the ways that consumers, businesses, and governments may respond to it.
Covid-19 will most directly shape economic losses through supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. And it will do so both in traditional, textbook supply-and-demand ways and through the introduction of potentially large levels of uncertainty.
An epidemic that began in the depths of China’s Hubei province is spreading rapidly.
There are now significant outbreaks from South Korea to Italy and Iran, and the first deaths have been reported in America.
The virus has disrupted the global supply of goods, making it harder for Kenya firms to fill orders. It will also affect workers due to a lack of supplies, reducing labour supply and slow down the demand for Kenya products and services.
The covid-19 outbreak is affecting supply chains and disrupting manufacturing operations around the world are increasing daily. But the worst is yet to come, the peak of the impact of Covid-19 on global supply chains will occur in mid-March, forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in China and other markets.
The most vulnerable companies are those which rely heavily or solely on factories in China for parts and materials such as electrical. The activity of Chinese factories has fallen in the past month and is expected to remain depressed for months.
Disruptions to global supply chains are one of the clearest effects of the coronavirus. There have already been significant disruptions, with the list of manufacturers outside of China forced to decrease production in their plants growing longer every day.
China shocks have spread across global financial markets before, including the surprise yuan devaluation in 2015. The coronavirus is repeating the pattern, and on a larger scale, as equities plunge around the world and deliver knock-on blows to household wealth and business confidence. As the world grapples with the virus, the economic impact is mounting, with the possibility of another global financial crisis. China is the world’s second-largest economy and leading trading nation, so economic fallout from the virus also threatens global growth.
Businesses operating in Kenya are dealing with lost revenue and disrupted supply chains due to China’s factory shutdowns.
Global growth is already slow, and financial markets already have very low-interest rates, which mean that central banks in almost every major country have little ammunition with which to mitigate any potential economic fallout. This puts greater pressure on governments to use the power of their purse to counter the economic fallout from the coronavirus.
The Kenya government can do a lot to counter the risks associated with the spread of the virus by engaging in fiscal policies that will provide relief to affected populations and mitigate disruptions to Kenyan firms.
Mounting pressure to reduce supply chain costs motivated companies to pursue strategies such as lean manufacturing, offshoring, and outsourcing. Such cost-cutting measures mean that when there is a supply-chain disruption, manufacturing will stop quickly because of a lack of parts. Furthermore, giving incentives for products from other markets.
China is the world’s biggest oil importer. With coronavirus hitting manufacturing and travel, we expect a drop in global oil demand, which is for the benefit to Kenya and other developing economies. Oil demand is now expected to fall by 435,000 barrels year-on-year in the first quarter of 2020, the first quarterly contraction in more than 10 years
Coronavirus is also taking a toll on the airline industry, with the International Air Transport Association predicting the outbreak could cost airlines $113 billion in revenue loss, Kenya Airways has cancelled its weekly flights to China this will have an impact on its ready weak financial position.
If we can quickly get the outbreak under control, and the world’s factory rumbles back to life in the second quarter, then the impact on the rest of the global economy could be contained, saving us from the global financial crisis.
Ndirangu Ngunjiri, Nairobi.