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Close look: Coronavirus and the ripple effect

4 years ago
It is known as an ‘exogenous shock’, an event not predicted by forecasting models which has far-reaching effects. Just like dropping a pebble in a pond, the initial impact can be small but the ripples spread wide. The coronavirus is just such an event. We look at how a local difficulty became global, even touching the biggest company in the world.

The virus first struck in Hubei province in China at the turn of the year. Within weeks the World Health Organization (WHO) had declared a global health emergency. Despite efforts to contain it, in the past month the virus has spread across Asia into the Middle East, Europe and the Americas. The WHO is considering declaring the coronavirus a global pandemic. 

The knock-on effects have also gained pace. The initial shock to the Chinese economy caused GDP growth forecasts to be cut from 6% to 5% for this year. Travel restrictions to and from China were put in place and the oil price tumbled along with demand for fuel. The price of industrial metals such as copper also fell, as China is a major global buyer. 

The shock wave moved to industrial components. Hubei supplies parts for finished goods from electronics to healthcare and from autos to aerospace. With its factories operating well below capacity, global supply chains have failed and assembly lines around the world have been disrupted. Tech giant Apple’s revenue warning resulted from a shortage of iPhone components.

Equity markets initially took this in their stride, hoping central banks would step in. But central banks can only boost demand and are powerless to help when supply chains seize up. Global stock markets reversed into the red as coronavirus repercussions spread ever wider.

There are always safe havens. Investors look to defensive equities, such as healthcare or utilities, as well as to government bonds and gold. Even currencies, such as the US dollar and the Swiss franc, are sought after. But unusually, due to the economy’s heavy reliance on components from China, the Japanese yen is not currently on the buy list.

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