Coronavirus: World Bank warns of danger to global economy as planes are grounded

Cargo routes disrupted as governments seek to stem the spread of the virus

Phil Thornton
Thursday 06 February 2020 11:19
Factories reliant on spare parts coming in from China are beginning to feel the effects of the virus
Factories reliant on spare parts coming in from China are beginning to feel the effects of the virus

The spread of the coronavirus will hit the global economy in the first half of this year because of the impact on supply chains that rely on free movement of air transport to carry spare parts, the head of the World Bank has warned.

Bank president David Malpass said a lot of Chinese goods are usually exported in the holds of passenger planes. These have been grounded by governments determined to stem the spread of the virus.

“As you cut down on passenger flights, you need to adjust the supply chains in order to get the goods out to make the products the whole world economy is operating on,” he said, adding that the process worked in reverse with goods going back into China that same way. “The country is the world’s biggest economy, and so there is the economic effect,” he said.

China is the largest in the world by nominal GDP, and also the largest when exchange rates and purchasing power are taken into account

“So, there will be a lowering of forecasts for at least the first part of 2020, in part due to China but in part due to supply chains.” Several factories across China have been shut down to help contain the virus.

While the initial focus by economists has been on how the uncertainty created by the virus will affect demand for products from the rest of the world, attention has begun to shift to the effects of the disruption to the supply of intermediate goods that are used in production around the globe.

Simon MacAdam, global economist at Capital Economics, said that owing to their deep integration into regional supply chains, several economies in emerging Asia will be worst affected by prolonged factory closures in China.

“Even industries that appear to have low exposure to Chinese suppliers will almost certainly contain firms that are heavily reliant on inputs from China,” he said, highlighting South Korea’s car sector where Hyundai had already closed its plants after running out of spare parts despite only 29 per cent of the industry’s foreign inputs coming from China.

“Even if the disruption turns out to be too small to shave anything significant off GDP growth, it doesn’t mean that it won’t cause serious problems in particular industries.”

Janet Yellen, the former chairman of the US Federal Reserve, the country’s central bank, said the size of China’s economy meant there were bound to be spillovers into the global economy. “What has happened in the past is there may be a short-term impact of an epidemic or a pandemic, but, longer term, it seems to have relatively little influence,” she told the Bipartisan Policy Centre in Washington DC.

“I think many observers are hoping that this will be true this time, but we don’t know where this is going. To my mind, it is clearly a source of uncertainty and risk to the global outlook.”

However, Mr Malpass added an optimistic note, saying that technology had come a long way in finding antidotes that can affect viruses. “So, we have some hope that science response will shorten the full lifecycle of this crisis,” he said.

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