At the beginning of the year, economists and business leaders expected U.S. economic growth to continue at a strong pace for the foreseeable future, but the widespread outbreak of the novel coronavirus has changed that outlook.
A confidence drain has rattled stock indexes in recent weeks, and the outbreak is already disrupting production and transportation for manufacturers, which threatens broader economic fallout, says Cheryl Druehl, an associate dean and professor of operations management at George Mason University.
“There will be wide-reaching influence on the supply chain,” she says. “We could see serious impacts in every kind of manufacturing.”
Efforts by the Chinese government to contain the virus haven’t completely sealed off exports, but they’ve caused the pace to slow 17.2% from the year before, according to customs data released on March 7, after they rose nearly 8% in December.
As of 12:45 p.m. on March 11, the virus has infected 125,000 people worldwide, with more than 1,000 confirmed cases in the U.S. Despite the vast majority of suffers surviving the illness, uncertainty over containment of the disease caused public markets to experience the single largest drop in value in one day since the 2008 financial crisis. On March 9, the Dow plunged 2,000 points and shed nearly $5 trillion.
“Fears of a pandemic are as contagious as the virus itself,” says Kelly Crane, chief investment officer for Napa Valley Wealth Management, an advisory firm that provides financial consulting services to small and midsize companies.
“THERE WILL BE WIDE-RANGING INFLUENCE ON THE SUPPLY CHAIN. WE COULD SEE IMPACTS IN EVERY KIND OF MANUFACTURING.”
Associate Dean for Faculty and Professor of Operations Management, George Mason University
As the world’s second-largest economy, what happens in China effects the whole world. “As people—not to mention cities, airplanes and ships—are quarantined, the movement of goods and services will slow. The more the virus spreads, the more restrictions will increase, and economies will downshift further,” Crane says.
Small and midsize businesses are especially vulnerable to supply chain disruptions because many don’t have a clear picture of their place in the logistical food chain.
“Everyone knows who they’re contracting with and where their things are being manufactured,” Druehl says. “But they may not know where that person’s getting their supplies or—more importantly—where that next person’s getting their supplies.”
Nor do small and midsize companies have extra cash to wait out shortages or find new suppliers. Delayed deliveries and idle factories could lead to a wave of order cancellations—and layoffs—that could further deepen the economic impact. “Hopefully we don’t get there, but it’s a possibility,” Druehl says.
Infections in China and around the world are expected to abate in the spring and summer, and Druehl anticipates a quick recovery. But if factories continue to have difficulty exporting to the U.S., there could be a greater ripple effect through the supply chain.
OVER THE LONG TERM, COMPANIES MAY NOT BE AS WILLING TO RESTART RELATIONSHIPS WITH SUPPLIERS IN CHINA, WHERE THE CORONAVIRUS ORIGINATED, AND MAY INSTEAD MOVE THEIR OPERATIONS ELSEWHERE IN ASIA.
Companies that implement cost-cutting measures could put themselves in even deeper trouble. When demand and supply eventually rise again, small and midsize companies may not be able to meet them. “The further back you are in the supply chain, the longer the recovery takes to reach you,” Druehl says.
Over the long term, companies may not be as willing to restart relationships will suppliers in China, where the coronavirus originated, and may instead move their operations elsewhere in Asia.
Economic recovery will depend on how quickly authorities around the globe can stop the virus from spreading. If contained by the end of March, Crane expects the impact of the virus may only show up in this quarter. But if it continues to spread, economic and market repercussions could persist into 2021, affecting economies across the world.
“What we know about the coronavirus: It can jump from economy to economy, too,” Crane says.
Benjamin Glick is ACG Global’s marketing and communications associate.