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7 PM | Corona, crude, credit | 12th March 2020

Context: Corona virus and its impact on Economy.

Mains 2020: Covid-19 and its impact on global economy.

Global markets haven’t witnessed such panic and dislocation since the global financial crisis of 2008. Global equity markets have collapsed, the US’s 10-year bond is at its lowest level ever, and crude prices underwent their largest single-day fall in 30 years.

 

This brings us to the questions about impact of the coronavirus on the global economy. In this article, we will explain the following:

– What is the Impact of corona virus on different sectors: – decline in crude oil prices, automobile sector, gems and jewellery?

– Why crude oil prices declining?

– What is its impact on India?

– What are the policy interventions?

– Way forward

What is the Impact of corona virus on different sectors: – decline in crude oil prices, automobile sector, gems and jewellery?

Besides its worrying effects on human life, the novel strain of coronavirus (COVID-19) has the potential to significantly slowdown not only the Chinese economy but also the global economy.

Estimates published by United Nations Conference on Trade and Development (UNCTAD) said that the slowdown of manufacturing in China due to the coronavirus (COVID-19) outbreak is disrupting world trade and could result in a 50 billion dollar decrease in exports across global value chains.

Over the last month, China has seen a dramatic reduction in its manufacturing Purchasing Manager’s Index (PMI) to 37.5, its lowest reading since 2004. This drop implies a 2 per cent reduction in output on an annual basis. This has come as a direct consequence of the spread of corona virus (COVID-19).

Impact on oil market: Coronavirus affects the oil market in two ways.

  • First, travel restrictions due to containment efforts limit the use of jet fuel, and supply chains slow and industrial activity declines as companies send workers home—meaning less oil and oil-based products are being used and produced. This has very direct effects on oil consumption and informs near-term calculations of real oil demand.
  • Second, the stock market reaction to the effect of the coronavirus on the global economy builds a projection of global oil demand over the long-term. As broader market sentiment about the health of the global economy declines, so do projections about the future oil demand curve, prompting flight away from oil and energy stocks and further drawing down prices.

Impact on Automobile Sector: China is the world’s biggest car market, and Wuhan, the city at the center of the outbreak, is known as a “motor city” for being home to auto plants including General Motors, Honda, Nissan, Peugeot Group and Renault.

  • As the coronavirus spread, many auto companies across the country closed their doors as part of the recent nationwide shutdown. Largely as a result, car sales in China fell 92% in the first half of February, according to the data from the China Passenger Car Association (CPCA).
  • The impacts on the auto industry are being felt beyond China’s borders, as shortages of supplies from China stall production around the world.
  • For example, Hyundai and Kia recently stopped several assembly lines in Korea and Nissan announced it would suspend its auto production in Japan.

Impact on gems and jewellery:

  • The Hong Kong jewelry and gems shows moved its dates from March 2–8 to May 18–21, citing the safety and health of those involved. And the Swatch Group canceled its Time to Move event in Zurich, originally scheduled for late February, due to the spread of the virus.
  • India’s diamond industry in particular is exposed to disruptions in China. It was expecting to see its supplies to China via Hong Kong for the New Year rise as a result of the partial lifting the China-U.S. trade dispute.
  • Surat imports rough gems and exports polished diamonds to and from Hong Kong and China. Exports were expected to rise sharply in the first quarter, but with Hong Kong on forced holiday through March 3 and flights grounded, the Surat diamond industry is suffering.
  • According to India’s Gems and Jewellery Export Promotion Council (GJEPC), a majority of exports of polished and cut diamonds to China also go via Hong Kong but the coronavirus is hurting consumer demand, resulting in a dip in exports. Diamond companies having offices in Hong Kong and China have asked their staff to return in view of the vacation.

Why crude oil prices declining?

The market mayhem is the upshot of three global shocks interacting with each other.

  • First, a negative demand shock around the world.
  • Second, a negative supply shock emanating from China.
  • Third, a positive oil supply shock.

As the coronavirus spreads globally, households and businesses are understandably avoiding taking risks, and the consequent “social distancing” is expected to exert significant demand destruction around the world.

The widespread industrial closures in China on the back of the COVID-19 outbreak will impact imports and supply chains in other countries and thereby constitute an adverse supply shock for the rest of the world.

The failure of oil producers to agree on production cuts has led to a price war with production increases. While the first leg of the decline reflects virus-related demand destruction fears, the second leg reflects a positive supply shock, which even adjusting for the concentrated stress in the oil sector, is growth-additive for the world and particularly for India.

What is its impact on India?

  • India is among the 15 most affected economies due to the coronavirus epidemic and slowdown in production in China.
  • According to a UN report, the trade impact of the coronavirus epidemic for India is estimated to be about 348 million dollars and the country figures among the top 15 economies most affected as slowdown of manufacturing in China disrupts world trade.
  • Trade Impact: For India, the trade impact is estimated to be the most for the chemicals sector at 129 million dollars, textiles and apparel at 64 million dollars, automotive sector at 34 million dollars, electrical machinery at 12 million dollars, leather products at 13 million dollars, metals and metal products at 27 million dollars and wood products and furniture at 15 million dollars.
  • Domestic rates of petrol and diesel, down about Rs 4 a litre since mid-January, are set to decline further as crude oil slumped to a 13-month low on Thursday to about $52/barrel on fears that the coronavirus outbreak may take a heavy toll on global economic growth and oil demand.
  • Falling oil prices are good for heavy energy consumer like India that imports 85% of its oil needs. Lower oil prices help keep inflation in check, reduce fuel subsidy, cut current account deficit and leave more resources in the hands of the state for public spending.
  • Current account deficit: It is estimated that every $10 reduction in crude prices, boosts growths by about 20-25 bps. Therefore, the $30 decline in crude, if it holds, should boost growth by about 60-70 bps, thereby largely offsetting the negative hit to growth from external trade and tourism. Furthermore, crude at $35-40, along with the global demand destruction is expected to generate large disinflationary forces, opening up space for monetary easing. Finally, India’s current account deficit would virtually disappear, for the first time since 2003-04.

What are the policy interventions?

  • The growth offset will assume that the coronavirus does not spread within India. If India witnessed a rapid domestic proliferation, heightened risk aversion by economic agents could meaningfully hurt domestic demand. The best antidote to a prolonged growth hit would be to aggressively contain the virus domestically.
  • Fiscal Support: A “sudden stop” of demand to certain sectors may necessitate fiscal/liquidity support to ensure these don’t magnify into more disruptive credit events for the financial sector.
  • A sharp cut in domestic fuel prices will boost household purchasing power and aggregate demand. Thereby the revenue (increase in tax collection) of the government will increase. Thus further will maintain the fiscal deficit target within the range and will provide the needed expenditure for the government spending.

Way Forward:

In order to assess the possible impact of the coronavirus on the economy, it is important not only to focus on the epidemiological profile of the virus but also on the ways that consumers, businesses, and governments may respond to it. COVID-19 will most directly shape economic losses through supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. And it will do so both in traditional, textbook supply-and-demand ways and through the introduction of potentially large levels of uncertainty. The World Health Organization described the new coronavirus as a pandemic for the first time. Therefore, policymakers should immediately undertake a number of steps to address any economic fallout from the virus.

 

Source: https://indianexpress.com/article/opinion/columns/coronavirus-outbreak-effect-on-global-markets-india-bse-sensex-economy-6309810/

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