Output drop in China due to coronavirus costs world economy about $50bn, UN says

The world's second-largest economy is a key provider of components for many products including automobiles, medical equipment and mobile phones

The IEA cited slowdown in China, where the government restricted the movement of its population to contain the virus, as the main factor behind its outlook.. AFP.

The contraction in China’s output due to the coronavirus outbreak has cost the global economy about $50 billion (Dh183.6bn) as exports declined, according to a United Nations agency report.

China, the world’s second-biggest economy, is a key provider of components for many products including automobiles, mobile phones, medical equipment and clothing. Global trade is suffering and supply chains have taken a hit across sectors, with factories across China remaining idle or only partially operating as Beijing tries to curb the spread of the virus.

“The 2 per cent contraction in China’s output has ripple effects through the global economy and thus far has caused an estimated drop of about $50bn across countries,” the United Nations Conference on Trade and Development (UNCTAD) said. “The most affected sectors include precision instruments, machinery, automotive and communication equipment.”

The coronavirus which started in the Chinese city of Wuhan, has spread to more than 70 countries, killed more than 3,200 people and infected more than 94,00 people. Countries such as Iran, South Korea and Italy are now reporting faster infection rates than China.

The slowdown in China's economy led to its manufacturing Purchasing Manager’s Index (PMI) plunging to 37.5, its lowest reading since 2004. It implies a 2 per cent reduction in its output on an annual basis. A reading below 50 is indicative of a contraction in an economy and one above 50 points to expansion.

Container vessel departures from Shanghai were substantially lower in the first half of February but increased in the second half. However, the Shanghai Containerised Freight Index continues to decline, indicating excess shipping capacity and lower demand for container vessels.

Currently, about 20 per cent of global trade in manufacturing intermediate products originates in China, up from 4 per cent in 2002.

“China has become the central manufacturing hub of many global business operations. Any disruption of China’s output is expected to have repercussions elsewhere through regional and global value chains,” UNCTAD said.

“Even if the outbreak of Covid-19 is contained mostly within China, the fact that Chinese suppliers are critical for many companies around the world implies that any disruption in China will be also felt outside the country’s borders, impacting European, American and East Asian regional value chains,” the UN agency said.

The industries expected to be affected include machinery, automotive and chemicals in the European Union; machinery, automotive and precision instruments in the US; machinery and automotive in Japan; machinery and communication equipment in South Korea.

Countries or regions suffering the highest export losses include the EU, estimated at $15.6bn, the US at $5.8bn, Japan ($5.2bn), Singapore ($2.1bn), South Korea ($3.8bn) and Vietnam ($2.3bn), among others. The impact on the economies of Saudi Arabia and the UAE is estimated to be $40 million and $16m respectively, the report noted.

“A reduction in Chinese supply of intermediate inputs can affect the productive capacity and therefore the exports of any given country depending on how reliant its industries are on Chinese suppliers,” the report said.

Some European auto manufacturers may face a shortage of critical components for their operations and companies in Japan may find it difficult to obtain parts necessary for the assembly of digital cameras.

The World Bank along with the International Monetary Fund are leading calls for a coordinated global monetary policy response to reduce the impact of the deadly outbreak that is threatening to derail the global economy's growth. The US Federal Reserve cut interest rates this week to offset the impact on the world's largest economy. Gulf central banks followed suit.

Earlier this week, the Organisation for Economic Co-operation and Development, revised down its estimate of global GDP growth by half a percentage point to 2.4 per cent in 2020. It said global growth could fall to 1.5 per cent if the outbreak persisted and could tip many countries into recession.