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Coronavirus and the Effect On the Economy

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    Executive Summary

    Since the start of the outbreak of the coronavirus in China in December 2019, businesses worldwide have been affected due to the shortage of supplies and goods. China has quarantined the city in which the virus originated from, and had extended the Lunar New Year holiday to February 10, 2020, in efforts to reduce the transmissions of the virus (Gurman). This has discouraged many factories from staying open even after the extended holiday (“Measuring the Economic Impact”). This has affected various multinational corporations, such as Apple Inc., General Motors, Hyundai Motors, Amazon, Tesla, and even Facebook (Ghaffary). Many economists are afraid of what the impact of the virus could cause to the world markets and are having difficulty gauging just how much impact the economy will receive from the halt of Chinese factories, and the reduction of production (“Measuring the Economic Impact”). The virus has already affected the financial sector, with Dow Jones Index falling 1,000 points on February 24, 2020 (Horsley). Now many companies are forming plans to ensure their supply chain does not falter due to the factory shutdowns in China (John). It is expected for the economy to bounce back if it is contained appropriately soon, but for now, many companies are preparing for the worst-case scenario.

    Introduction to COVID-19

    In December 2019, a new virus was detected in the central province of Hubei in China, more specifically in the city of Wuhan. The virus is a form of coronavirus, the World Health Organization has now named it COVID-19, and it is a respiratory disease that can be transmitted from person to person (“What Is Coronavirus?”). This virus is currently causing an economic problem, and we are now feeling the effects of the outbreak on the economy. Although the coronavirus is a new disease, it is already proving to not only affect the health and lives of many people, but also the health of the economy.

    The Impact on the Economy

    As of February 25, 2020, there have been 77,600 confirmed cases in China alone, and 2,663 deaths in total. While Italy is the second country with the most confirmed cases outside of Chine with a total of 283 cases, and seven deaths (NBC News). This information is important because it is a factor that will help us understand how serious this virus is, and predict what sectors in the market it will affect the most. The economy is being affected by the coronavirus due to the fact that China is the largest market in the world (Tenreiro). Companies that sell goods in China have taken substantial hits to their revenue since more and more Chinese citizens are being quarantined and are afraid to leave their homes (Tenreiro). Not only are there fewer consumers in China currently but China has also ordered the shutdown of factories to reduce the spread of the illness, thus reducing the supply of components or goods being produced by these factories (Tenreiro).

    The stock market is also feeling the effects of the virus, it has been reported that the Dow Jones Index has plummeted by a 1,000 points, and all various other major indexes have also fallen by 3.5% (Horseley). Not only has the stock market been affected in the United States but also stock markets in Europe and Asia (Horseley). There has not been a formula to exactly measure the impact the economy will take due to the outbreak, there are various gauges that Economists are using to estimate, or get an idea as to what extent the impact will be (Curran). Torsten Slok the chief economist for Deutsche Bank believes to track the impact of the virus “is all about identifying the transmission channels… global tourism, supply chain disruptions, Chinese consumer spending, lower commodity prices, and wealth effects from global lower stock prices…” (Curran). While evaluating the impact on the economy is not exact, looking at the figures that Slok describes, will inform us of how these market sectors are being affected and therefore predict the overall effect on the economy.

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    Tech Companies Have Been Infected

    Various tech companies have also felt the burden of the outbreak since the outburst of the virus many factories have been shutting down completely and production has slowed down. Usually, production slows down in January due to the Lunar New Year, in which many workers are granted a holiday off work, with the spread of the disease this has laid off workers longer than expected. Apple’s largest producer of iPhones, Hon Hai Precision Industry (Foxconn) resumed work on February 10, 2020, a week longer than usual (Gurman). Although Hon Hai commenced work, it is still isolating workers for another seven to fourteen days (Gurman). This has caused tension in Apple’s supply chain, now it is said that the Apple’s AirPods Pro and the new budget iPhone may be the most affected by this delay since Apple was planning to launch the new iPhone towards the end of March (Gurman).

    Apple has cited that they will miss their projected sales forecast, due to the interruption of the production and demand (Davalos). The same constraints are being felt by other tech companies such as Amazon, Facebook, and Tesla (Ghaffary). Amazon has begun stockpiling “supplier items” from China to reduce the future impact of the virus on Chinese suppliers (Ghaffary). While Tesla is claiming that the virus is a risk to their business, while Alibaba a major tech company is calling the event volatile (Ghaffary). Facebook is also expecting less production for its upcoming product the Oculus Quest a virtual reality headset, also due to the slowdown in production from the Chinese factories caused by the virus (Ghaffary). Of course, the companies are taking steps to prevent further spread of the virus while also attempting to meet their financial targets.

    Auto Making Industry hit by Virus

    The automaking industry has also been affected by the coronavirus outbreak, General Motors (GM) is attempting to maintain the flow of parts to their more profitable factories undisrupted (Welch). In efforts to delay the effects of the coronavirus shutdowns in China from their own car factories in the United States (Welch). GM does not expect to shut down production in their plants located in Texas, Michigan and, Indiana (Welch). Although the Auto Workers union has commented that part shortages at the plants are growing, which produces GM’s more profitable models such as the Cadillac Escalade (Welch). IHS Markit expects an 11% decline in worldwide production of vehicles in the first quarter of 2020, while also estimating a 27% descent in China alone (Welch). Hyundai Motor Company has also been affected by the disease, by completely halting all manufacturing in South Korea (Park). Hyundai was hit by a shortage of wiring components that are produced in a plant in China after the Chinese plant halted production due to an employee being infected by COVID-19 (Park). Hyundai Motor, GM and Fiat Chrysler Automobiles are also searching for an alternative supplier for the meantime to increase supply, but this could be costly due to having to negotiate with the new suppliers (John). So far IHS Markit believes it will be difficult to assess “the effect of the production halts” due to “different components produced in China… as well as other factors such as buffer stock and the volume of inventory already in transit” (John). Not only is the coronavirus affecting production for tech companies, but also the automaking industry.

    Conclusion

    The COVID-19 outbreak has already proven to take a toll on not only the human body but also the world economy. Major corporations such as Apple, Amazon, Facebook, GM and, Hyundai have already shown signs of alarm due to the sharp decline of production in China, and they are feeling the effects on their supply chain and financial targets. To mitigate the effects of the virus on the world markets, governments should strictly follow guidelines that help reduce the spreading of the coronavirus, therefore ensuring that their population is safe, healthy and continue to be productive. The longer it takes to contain the virus, the longer it will take for the economy to recuperate and most importantly the more lives the virus will take. Therefore, the government should invest in the health of its citizens to mitigate the wave of consequences that the disease brings with it.

    References

    1. NBC News. “Coronavirus Updates: Death Toll in China Hits 2,663 as Pandemic Fears Grow.” NBC News, NBC News, 25 Feb. 2020, www.nbcnews.com/news/world/coronavirus-updates-pandemic-risk-grows-if-countries-don-t-cooperate-n1142301. Accessed 25 Feb. 2020.
    2. “Dow Jones Industrial Average (^DJI) Charts, Data & News – Yahoo Finance.” @YahooFinance, 2020, finance.yahoo.com/quote/%5EDJI?p=^DJI. Accessed 25 Feb. 2020.
    3. Tenreiro, Daniel. “How Coronavirus Affects the Economy.” National Review, National Review, 24 Feb. 2020, http://www.nationalreview.com/corner/how-coronavirus-affects-the-economy/. Accessed 24 Feb. 2020.
    4. Horsley, Scott. “Stocks Fall Sharply On Coronavirus Fears.” NPR.Org, 24 Feb. 2020, www.npr.org/2020/02/24/808811280/stocks-fall-sharply-on-coronavirus-fears. Accessed 24 Feb. 2020.
    5. “Measuring the Economic Impact of the Coronavirus Outbreak.” Stratfor Analysis, Jan. 2020, p. N.PAG. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=bth&AN=141491538&site=ehost-live.
    6. John, Alexa St. “Supply Chains Brace for Coronavirus Impact: Automakers, Suppliers Seek Contingency Plans.” Automotive News, vol. 94, no. 6920, Feb. 2020, p. 4. EBSCOhost, ezproxy.uhd.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=141722286&site=ehost-live.
    7. Davalos, Jackie. “Oil Retreats After Apple Warning Rekindles Coronavirus Fears.” Bloomberg.Com, Feb. 2020, p. N.PAG. EBSCOhost, ezproxy.uhd.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=141803652&site=ehost-live.
    8. Curran, Enda, and Michelle Jamrisko. “Experts Are Getting Creative to Measure Coronavirus Blow to Economy.” Bloomberg.com, Feb. 2020, p. N.PAG. EBSCOhost, ezproxy.uhd.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=141665263&site=ehost-live.
    9. Gurman, Mark, and Jeran Wittenstein. “Apple’s Outlook Clouded as Coronavirus Extends Production Delays.” Bloomberg.com, Feb. 2020, p. N.PAG. EBSCOhost, ezproxy.uhd.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=141598793&site=ehost-live.
    10. Ghaffary, Shirin. “CoronavirusIs Starting to Impact the Business of Apple, Facebook, and Other Companies.” Vox, Vox, 20 Feb. 2020, www.vox.com/recode/2020/2/20/21145803/coronavirus-impacting-big-tech-business-apple-amazon-facebook-big-tech-impacted. Accessed 25 Feb. 2020.
    11. Welch, David. “GM Scrambles to Shield U.S. plants From Virus Disruption.” Bloomberg.com, Feb. 2020, p. N.PAG. EBSCOhost, ezproxy.uhd.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=141723270&site=ehost-live.
    12. Park, Kyunghee. “Hyundai Halts Korea Output as Virus Causes Parts Shortage.” Bloomberg.com, Feb. 2020, p. N.PAG. EBSCOhost, ezproxy.uhd.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=141547283&site=ehost-live.
    13. What Is Coronavirus? 2019, http://www.hopkinsmedicine.org/health/conditions-and-diseases/coronavirus. Accessed 26 Feb. 2020.

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