Is there going to be a recession because of coronavirus? Why stock markets are nervous. – Vox.com

Last week, Apple had some news: There is going to be an iPhone supply shortage.

The outbreak of the novel coronavirus in China has both disrupted manufacturing and depressed demand for iPhones in that country. Apple said its factories are ramping up, but slowly, and Apple stores and many partner stores had to close. “As a result, we do not expect to meet the revenue guidance we provided for the March,” the statement read.

This is doing business in the time of the coronavirus. The spread of Covid-19, as the disease is formally known, is unsettling supply chains, sapping sales of some products, throwing travel into chaos, freaking out the stock markets, and intensifying fears of a global recession.

Apple, in its statement, called the disruption temporary. And that is the hope: that any hurt to companies and manufacturers and economies is a short-lived, passing pain.

But there’s still so much we don’t know about the coronavirus, which makes the potential economic fallout extremely uncertain, for both China and the rest of the world. It is also difficult to completely isolate one factor — in this case, a virus outbreak — from everything else happening in the world that can rattle the markets or strain economies.

So how deep, lasting, or widespread any economic strain will be is hard to predict.

China makes up a much larger share of the world economy than it did in 2003, when SARS, another illness caused by a type of coronavirus, broke out. Today, companies like Apple and Nike and other manufacturers and companies around the world are already admitting they’re feeling the negative effects of the virus.

So too are industries tied to travel and tourism. Airlines, cruise lines, hotels; they all take a hit during outbreaks due to travel bans and warnings, and general fears — real or hyped — about contagion.

And even if the novel coronavirus doesn’t cause a global recession, it could still bring significant long-term changes to the global economy by convincing companies of the need to diversify their supply chains to be less reliant on China.

“It’s a potential threat to the global economy as it goes on longer,” Rohan Williamson, a professor of finance at Georgetown University’s McDonough School of Business, told me. Supply chains can deal with disruptions for a few weeks, relying on supplies they have saved in house. But if it continues past that, he said, “it becomes a little more troubling.”

The Dow Jones plunged by 1,100 points on Thursday, one of its worst point drops in history.

As of February 27, China has more than 82,000 confirmed cases. The virus has now spread to other parts of Asia, Europe, South America, and the United States. More than 2,000 people have died, most in mainland China, the epicenter of the outbreak.

The fear that coronavirus will continue to spread and impact the global economy looks to be the main reason for the economic jitters.

The coronavirus could prove to be deadlier than it currently is; the fatality rate is around 2 percent, but that could change. It could also prove to be the opposite, if more people are found to have mild cases. The coronavirus could become a pandemic; it could also taper off. Government intervention could dull the effects in populations; a bungled response could do the opposite.

The stock market isn’t the economy, but it’s a signal that investors are worried about the economic outlook for the coming year because of the virus. Basically, they’re predicting that the coronavirus will continue to spread and cause more disruptions, depress demand, and maybe cause a global slowdown. Right now, investors don’t know this is going to happen — no one does — but they’re preparing as if it will. They’re reacting to fears now, but if good news starts breaking, it could swing in the other direction.

Williamson said the stock market volatility is driven by this uncertainty. “As an investor you’re trying to say, here’s this virus. What’s going to be the reaction with the worst case, if things get really bad?” he said. “So your response is going to be prices drop, because you’re going to say, ‘I don’t want want to be the one holding the security if things go really bad [in] a few months. So I will sell it right now.”

Investors are preparing for the worst, and some companies and analysts have changed their forecasts for earnings this year. For example, Goldman Sachs revised its earnings growth estimates to zero for US companies. “US companies will generate no earnings growth in 2020,” Goldman Sachs’ chief US equity strategist, David Kostin, said in a note to clients Thursday. “We have updated our earnings model to incorporate the likelihood that the virus becomes widespread.”

Apple is one of those companies that have revised down their projections for this quarter. Nike, too, is expected to have a grim quarter.

Companies like Nike and Apple also get a bit of a double whammy. “These are two companies that manufacture a significant amount of their products in China, but they also sell a significant amount of products to China,” Randy Frederick, vice president of trading and derivatives at Charles Schwab, told me.

Factories in China were already operating with smaller staffs or delays because of the Lunar New Year. Then came the coronavirus emergency, which saw many factories shuttered. Even as some factories in unaffected areas of the country try to restart production, travel restrictions made it difficult for people to get to work. And because everything is happening so slowly, it is going to take time for these manufacturers to scale back up.

“Even if you came back to the factory, you have to spend 14 days in quarantine. We have some longtime workers that haven’t even returned,” a worker in a Chinese factory told NPR earlier this month.

Then there is the retail side. Government-mandated lockdowns in several cities in China have kept people off the streets — and therefore out of shops, restaurants, hair salons, theaters, and so on.

Many simply closed. Apple closed its stores and corporate headquarters and though has now reopened about half its stores again. Starbucks shut down 2,000 stores in China, about half of its total locations, though it too has started to resume operations.

Pretty much all businesses that rely on China as part of their supply chains or have big retail presences within the country face similar challenges.

Luxury fashion brands in particular, which depend heavily on Chinese buyers, are taking a hit. A report this week from the investment management firm Bernstein found that the coronavirus could end up costing the luxury market as much as $43 billion in sales in 2020, Business Insider reports.

And while big-name brands get the attention, smaller manufacturers might be even less resilient to the shock. For instance, sellers on Amazon, who often rely on cheap Chinese products, are getting pummeled, with dwindling stock to sell. “I don’t think the Amazon platform has seen such a massive amount of inventory problems as we are about to see,” Patrick Maioho, who sells kitchen products on Amazon and advises on manufacturing in China, told the Wall Street Journal this week.

Then there are the airlines, which some experts say could lose as much as $100 billion, and all the other businesses that rely on tourism: hotels, casinos, cruises, tour companies, and more. Chinese tourists are some of the world’s biggest spenders, and travel restrictions, quarantines, and closed borders are making tourism increasingly difficult, to say nothing of visitors to China.

All this means that many industries will likely have a bad start to 2020. But although it may not be a satisfying answer, how bad it will be depends on how long — and how far — the coronavirus continues to spread.

Right now, much of the economic pain is centered in China, and on companies that rely on China for parts or products. But as the virus spreads, and other countries start seeing the number of cases balloon, that pain will be spread around.

“I think we should expect that every country will see cases, and the duration of infection could go on for months — I don’t think we have an end period, necessarily,” Jennifer Nuzzo, an infectious disease expert and senior scholar at the Johns Hopkins Center for Health Security, told me.

Everyone wants to know if the new coronavirus will cause a global recession. The short answer is that it definitely could. Here, again, though, whether it will — and if it does happen, how bad it might be — depends on when the coronavirus emergency is resolved.

A recession is generally defined as two back-to-back quarters of negative economic growth, usually measured by gross domestic product (GDP) — that is, the total value of final goods and services produced within a certain period (in this case, usually a quarter of a year).

Experts I spoke to said that China’s GDP will probably suffer pretty badly this first quarter, and since it makes up about 17 percent of the global economy, that’s not great news. China’s estimated GDP growth for the first quarter of 2020 was about 6 percent. “The vast majority of all economists and others looking at China —and what we know about the virus so far — are expecting, best-case scenario for Q1 in China, zero. Many are expecting negative GDP in Q1, so that right there is going to hurt global GDP to the extent China’s that big,” Frederick said.

What happens in China will have ripple effects outward to the rest of the world. The Eurozone countries are definitely bracing, as its GDP only grew 0.1 percent at the end of last year, so any shock could likely push it toward negative growth.

The US does have one of the world’s strongest economies right now, so it’s a bit more protected. The US’s GDP grew 2.1 percent in the fourth quarter of last year, and experts say it might do a bit worse at the start of 2020 than it did last quarter, but is unlikely to see negative growth, at least for now.

Of course, the big question is how long does this coronavirus outbreak go on? If the coronavirus isn’t contained and these trends continue, the likelihood of a global recession increases. It’s also important to remember that the coronavirus is just one factor, which might exacerbate other strains on the global economy, like trade wars.

“As it gets more and more severe and infects more and more people, the impacts become greater and greater, and the countries that are teetering on recession already anyway will be right there,” Williamson said.

Experts I spoke to cautioned that if governments respond appropriately and this outbreak is blunted, the worst-case scenario will probably be avoided. That doesn’t mean it will be averted equally around the world, or even in all industries or labor forces, of course. But when it comes to the global economy, the theme for now is “don’t panic.”

And if the world gets the best-case scenario, and this outbreak is resolved within the coming weeks, a bounce-back might mitigate some of worst effects from the start of this year.

This is good news for companies like Apple that make durable goods, but could be bad news for services like restaurants or casinos or hotels, which will have a harder time making up the lost revenue, Frederick, the VP of trading and derivatives at Charles Schwab, told me.

He explained that if you wanted to, say, buy an iPhone or a washing machine or a car but weren’t able to because of a supply shortage, or a store closing, you might be okay waiting to buy that product later once it’s available again — provided that the economic shock is temporary enough that you still have a job and money to spend.

But if you normally go to a coffee shop every day or if you hit the casino every weekend, and now you can’t because of the coronavirus, once things get back to normal, you’re not all of a sudden going to make multiple trips or visits to make up for that.

The coronavirus outbreak has definitely exposed vulnerabilities for companies, especially those that rely heavily on China for their supply chains and products. This may force companies to cut some of their dependence on China, something that already started to happen because of President Trump’s trade war.

That almost certainly doesn’t mean abandoning China altogether, but rather distributing or diversifying supply chains to better protect against major crises that dramatically impact one country or one region more than others.

That also does not necessarily mean more manufacturing will come back to the United States, as Commerce Secretary Wilbur Ross recently claimed, but it means companies will likely be looking elsewhere.

And even for companies that aren’t really dependent on China, it’s still a good reminder that no one knows when or where the next pandemic or crisis might happen. But one thing is certain: There will be another one at some point. Which means preparing for that now is a good idea.

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