Corona Virus- A Global Recession Initiator?

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Presently, Novel Corona-virus has become a global concern. It was first identified in Wuhan, the capital of China’s Hubei province, in early December 2019. The World Health Organization (WHO) declared the virus a Public Health Emergency of International Concern (PHEIC) on January 30, 2020. However, the virus has not yet been declared a ‘pandemic’[1]. WHO has not recommended any trade or travel restrictions. Besides the health hazard in mass scale, this virus might cause economic recession throughout the world.

A global recession is a downturn that affects many countries around the world that is, a period of global economic slowdown or declining economic output. It happened last time in 2008. The US economy appears poised to enter a recession within the next two years, a new survey out has identified. More than 70% of economists surveyed by the National Association for Business Economics said they think a recession will occur before the end of 2021.Stocks dropped sharply after a key recession signal flashed for the first time since before the global financial crisis in 2007[2].

The United Nations Conference on Trade and Development (UNCTAD) report said: “A spluttering north, a general slowdown in the south and rising levels of debt everywhere are hanging over the global economy: these combined with increased market volatility, a fractured multilateral system and mounting uncertainty, are framing the immediate policy challenge[3].” It said the global economy remained fragile even though the financial crisis ended a decade ago, and called for a fundamental rethink of a “business as usual” model that had saddled the developing world with record levels of debt. The report also said: “The macro-economic policy stance adapted to date has been lopsided and insufficiently co-ordinated to give a sustained boost to aggregate demand, with adjustments left to the vagaries of the market through a mixture of cost-cutting and liberalization measures. Ephemeral growth spurts and financial volatility have been the predictable results[4].”

The IMF estimates that global recessions occur over a cycle lasting between eight and ten years. During what the IMF terms the past three global recessions of the last three decades, global per capita output growth was zero or negative. In August 2019, a survey of economists by the National Association for Business Economics concluded that 72% of analysts expect a US recession to hit by the end of 2021.

Between November 2002 and June 2003, an outbreak of SARS infected around 8,400 people and killed just over 800 that caused “the worst economic crisis in Southeast Asia”[5]. The coronavirus looks set to have at least as severe an impact on global health as SARS. But given Chinese government admissions that it’s spreading faster, it could very well be bigger. If the Chinese government can’t get a handle on the coronavirus’ quickly, the virus’ spread could prove to be the straw that breaks the global economy’s back.

China is part of a global supply chain that fuels economy around the world. For example many manufacturing and retail business in Bangladesh will be badly affected if Coronavirus is not contained appropriately.

Alibaba, whose platforms sell two-thirds of everything bought online in China, has long been an indicator of the health of the country’s economy. The spread of the Covid-19 coronavirus has brought China to a standstill and will hurt Alibaba’s businesses “across the board”, warned Daniel Zhang, the chief executive, even as he unveiled a 56 per cent year-on-year rise in net income to Rmb52bn ($7.5bn) for the final quarter of last year. The company now expects its retail business, food delivery and other consumer units, together responsible for about 57 per cent of revenues in the fourth quarter, to shrink in the first three months of 2020. The unit has grown at more than 30 per cent annually for years[6]. In Hangzhou, where Alibaba has its headquarters, much of the city is under lockdown.

It might be felt that recent crisis should encourage more online shopping. But merchants on Alibaba’s platform lack inventory. The factories that supply them are struggling to restart. And those with goods to sell have found that courier companies are lacking couriers.

Photo-1: The World Economy, GDP by Country

The small companies that drive China’s economy are worried about how much damage the novel coronavirus outbreak will cause. Without help or a reprieve from the disease, many may have only weeks to survive. While some larger companies are reopening their doors after weeks of lockdowns designed to contain the epidemic, small businesses often can’t comply with the strict health rules now required in many regions and many don’t have the option of letting employees work from home.

A survey of 163 companies of all sizes across China found that less than half were able to get back to work this week, according to investment bank China International Capital Corp, which published the results. Even more alarming: A third of roughly 1,000 small and medium-sized companies surveyed by academics from Tsinghua University and Peking University said, they could only survive for a month with the cash they have[7].

That could spell terrible news for China’s entrepreneurs and an even worse reality for the country’s economy. About 30 million small and medium-sized businesses contribute more than 60% of the country’s GDP, according to government statistics published last September 2019. The taxes they pay account for more than half of government revenue, and they employ more than 80% of China’s workers.

China is struggling to return to work after the coronavirus outbreak shut down large swaths of the world’s second biggest economy for more than four weeks. Worker shortages, transport disruption, a lack of medical supplies and heavy-handed local officials are all making life difficult for businesses. “We have also noticed difficulties in fully resuming work,” Cong Liang, a senior official at China’s National Development and Reform Commission told reporters in Beijing, listing several factors including supply chain disruption, local government restrictions and a shortage of facial masks.

Senior officials in Beijing were speaking to reporters a day after an extended public holiday ended for much of the country, leading some businesses to try to reopen their doors. Others, though, remain closed, and local governments have issued mixed and in some cases muddled guidance about what companies should be doing[8].

Though there have been no coronavirus cases detected in Bangladesh so far, the country’s economy is now likely to face an adverse impact because it maintains close trade relations with China. Readymade garments (RMG) is a major sector of manufacturing and export for Bangladesh, and more than 50 percent of the raw materials used for this industry are brought from China[9]. Due to the virus outbreak in China, disruptions in the supply chain could continue for several more months, leading to a financial loss worth BDT 14-15 billion for the garments accessories sector alone. The failure of delivery from Chinese exporters may compel buyers in other countries to claim compensations for a breach of contract with regard to timely delivery.

Force majeure refers to a clause that is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations. Whether the coronavirus outbreak qualifies as a force majeure event ultimately will depend on the construction of the contractual clause at issue. Some clauses may make it reasonably clear if they specifically identify “disease”, “epidemic”, or “quarantine” as force majeure events. Other clauses may include more general events such as “acts of God”, “acts of government”, “strikes”, or “circumstances beyond the parties’ control”. The current outbreak could be a combination of more than one factor, the disease/epidemic itself and the government/public actions that ensue. Affected parties should carefully review the force majeure clauses in their contracts to determine whether they may apply. Consequently, Bangladeshi exporters may evaluate their sales contracts and also the possible impacts of failure to export RMG on time, and figure out whether they can claim compensation from Chinese sources of raw materials.

[1] A pandemic is an epidemic of disease that has spread across a large region; for instance multiple continents, or even worldwide. When an epidemic spreads throughout the world is called pandemic.
[2] More than 70% of economists think a US recession will strike by the end of 2021, https://markets.businessinsider.com/news/stocks/next-recession-trump-survey-shows-most-economists-predict-downturn-2021-2019-8-1028456445 , accessed on February 18, 2020.
[3] 2020 Global Recession Looms, UN Warns, https://tribune.net.ph/index.php/2019/09/26/2020-global-recession-looms-un-warns/ , accessed on February 19, 2020.
[4] Global recession a serious danger in 2020, says UN, https://www.theguardian.com/business/2019/sep/25/global-recession-a-serious-danger-in-2020-says-un , accessed on February 18, 2020.
[5] A Global Recession is Coming if China Fails to Kill Coronavirus Spread, https://24hourscrypto.com/a-global-recession-is-coming-if-china-fails-to-kill-coronavirus-spread/ , accessed on February 19, 2020.
[6] Alibaba warns of severe impact as coronavirus brings China to halt, Financial Times, https://www.ft.com/content/8a1a3d82-4e5c-11ea-95a0-43d18ec715f5 , accessed on February 18, 2020.
[7] Small businesses drive China’s economy. The coronavirus outbreak could be fatal for many, https://edition.cnn.com/2020/02/14/economy/coronavirus-china-economy-small-businesses/index.html , accessed on February 19, 2020.
[8] China is struggling to get back to work after the coronavirus lockdown, https://edition.cnn.com/2020/02/11/economy/china-coronavirus-returning-to-work-economy/index.html , accessed on February 19, 2020.
[9] The legal impacts of the coronavirus on RMG contracts, https://www.thedailystar.net/opinion/news/the-legal-impacts-the-coronavirus-rmg-contracts-1869370, accessed on February 19, 2020.
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