The coronavirus, which first appeared in Wuhan China, is not only causing medical risk in China but also breeding fear and even panic worldwide. The coronavirus causes a range of respiratory illnesses ranging from the common cold to severe outcomes, even death.
So far, the virus is only moderately infectious, but no one knows much about it, how it spreads or how far it will spread. But it is indeed spreading — 17,000 cases according to the Financial Times on February 4, over 43,000 cases as I write.
Some say the virus will ‘burn out’ under warmer weather. SARS did this back in 2003. Others fear it is a much more long-lasting problem. A big concern is how it will affect China’s manufacturing network and the world’s supply chain. The quarantine of Wuhan and the shutdown of many other parts of China coincided with the annual New Year’s Holiday so factories were about to close anyway. The problem is, when will China’s manufacturers reopen and when will the all-important Chinese consumer start spending again?
China is a much more important part of the global economy today (see below) than when SARS hit Southern China. In addition, transportation is light years faster today, allowing viruses to spread almost instantly. It is estimated that China now has over 15,000 miles of high-speed rail versus almost none back in 2003. Viruses can go from north to south and east to west with incredible speed now.
It is uncertain what the long-term effect of the coronavirus will be. It must be brought under control first and there is no timeline here. Second, the supply chain must be brought back up to speed quickly. A Wall Street Journal article recently noted how global the Apple iPhone is. It uses Swiss gyroscopes, Dutch motion chips, Japanese retina displays and American glass for the touch screen. Yes, it is global but remember virtually all iPhones are assembled in China by Foxconn’s nearly one million workers. Can this engine be restarted quickly? If not, a global slowdown is in the offing.
We admit that all this hand-wringing may be overly dramatic. Barron’s recently estimated that to reduce U.S. GDP by even 0.1% would require a loss of $22 billion. Starbucks has shut down 2,000 plus stores in China. This will hurt revenue by about $25 million per week. This means you need a significant amount of time and production loss to seriously affect the U.S. or the global economy.
The worry, however, is that there are a lot of Starbucks in this world and if each of them is affected negatively by a backup in the supply chain, you are throwing a giant monkey wrench in the works. Manufacturers have been looking for low-cost alternatives to China for years now (Vietnam? Mexico?) but no one has the transportation, access to labor, proximity to suppliers and speed of production that China has.
Barron’s went on to speculate that the biggest problem with coronavirus may not be a global slowdown or a recession but the fear of one. Global worries could fuel a downward spiral affecting our confidence, our spending and a decline in stocks. Bottom line, the consensus is for no recession in the U.S. in 2020 but keep an eye on your favorite stock’s supply chain. It is probably in China and how fast it recovers will probably reflect how your stock does.