The Corner

Economy & Business

How Coronavirus Affects the Economy

Customers wearing face masks shop inside a supermarket following an outbreak of the novel coronavirus in Wuhan, Hubei Province, China, February 10, 2020. (China Daily via Reuters)

U.S. stock indexes are down roughly 3 percent today as concerns about the Chinese coronavirus send shockwaves through the global economy. Below is a brief overview of how an epidemic that originated in a Chinese provincial capital has managed to affect Western firms.

Consumption. With a population approaching 1.4 billion, China is the largest market in the world. With stores shuttered and work opportunities reduced, Chinese consumption has ground to a virtual halt. Companies around the world that sell products to Chinese consumers are seeing massive hits to revenue.

Production. Numerous Chinese factories have shut down as the government attempts to stem the spread of the virus. That reduction in supply — seen in Apple’s decreased iPhone production and the shutdown of Tesla’s Shanghai factory — further inhibits economic growth not only for Chinese firms but also for multinational corporations with factories in China.

With firms producing less, demand for inputs such as oil also slow down, leading to broad reverberations on the global economy. Brent crude oil has dropped more than 5 percent today.

Supply-chain disruption. Firms that import parts from China have to find new suppliers for crucial components. In some cases, the infrastructure does not exist to quickly shift input production out of China. Even where non-Chinese suppliers exist, the delay in locating and negotiating with those suppliers costs firms sales. Advanced Micro Devices, a chip maker that supplies many large technology companies, has fallen six percent today.

Travel. Global businesses depend on the mobility of labor, especially at the executive level. Travel to and from China and its neighbors has plummeted, making it harder to do business. This hurts transportation companies in particular. American Airlines and Delta Airlines stock are both down more than 7 percent today.

Information uncertainty. China’s leadership has been sending mixed messages regarding the coronavirus. Observers have cast doubt on the official infection and death toll numbers, citing inconsistencies in the trajectory of cases. Moreover, while Chinese president Xi Jinping did not make remarks on the epidemic until January 23, an internal speech he delivered indicates he knew about the virus as early as January 7. That means authorities may have done less to contain the virus than they should have, and raises questions about their commitment to public health.

Skepticism of Chinese authorities amplify sell-offs as markets price in the possibility that the virus is much more widespread than officially believed.

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