Coronavirus Economic Crisis (Pt.1):
Volatile Markets and Supply Chain Disruptions
Volatile Markets
Markets
have been rough. Last week started with the circuit breakers on Wall Street
halting trading just 35 minutes after markets opened on Monday, the first time the
circuit breakers have tripped since 1997. After trading resumed, we saw the
most significant single-day drop in the U.S. stock market since the crash of
1987, with the Dow Jones dropping 7.79%, the S&P 500 7.6%, and the NASDAQ
7.3%.[1]
The day also ended with a very near end to the 11-year bull market, but the
week saw more to come. On the back of an announcement on Wednesday by President
Donald Trump to ban all travel to European countries except for the U.K. for 30
days, Thursday March 12th saw the circuit breakers kick in for the
second time in 3 days leading to significant losses and officially pushing the
U.S. into a Bear market. A Bear market is defined as a decline of at least 20%
from a recent peak, and as of Thursday, March 12th Data showed that
since the Dow Jones peak on February 12th it had dropped 29%, and since
their peaks on February 19th the NASDAQ and S&P 500 had dropped 27%.[2]
This is the second quickest return to a Bear market at 19 days with Great
Recession in 1929, the only one shorter at 15 days, but don't be alarmed. Stock
markets are designed to be volatile. While this has been an extreme case of market
panic, in time the market will bounce back and regain value. Stock markets are not
a reflection of how the economy is operating at this current moment in time but
are instead a forward-looking system. Markets look into the future and attempt
to predict the future based upon available knowledge surrounding known levels
of risk. It is essential to understand
why this is happening and why the markets have reacted in such a manner. The
bottom line is extreme uncertainty. The Coronavirus is currently unpredictable,
and the truth is no one truly knows the extent to what is currently happening
and what will happen in the weeks and months to come. Therefore, any level of prior
foreseen certainty has been completely eradicated. Now for a system such as the
stock market, which tries to predict the future, when there are no reasonable
means of doing this, it will fail and grip on to any piece information which
might be able to provide the slightest sign of stability. A prime example occurred
this week when, despite the stock market's most substantial losses in decades,
it also experienced its most significant single-day increase since 2008. The
Dow Jones and NASDAQ increased an average of 5.7% Friday morning and by the
end of day Friday the S&P 500 had surged 9%, after the U.S. and numerous
governments proposed fiscal stimuli to aid their economies, and Trump declared
a national emergency.[3]
If you include other novel events such as crashing bond yields, the oil price
war, varying government responses, and supply shocks combined with
irrationality, people’s expectations are constantly changing, leaving markets dangerously
vulnerable and volatile. While the markets will most likely continue to be
extremely sensitive and volatile until a proper response it implemented
globally, the disease is contained, and current fear levels fall, regaining a
certain level of future certainty, it is more important to consider the
economic impacts. The long and short terms effects of supply-side shocks caused
by the Coronavirus could have much more detrimental effects on our global
economy.
Supply Chain Disruptions
Supply
chain shocks - unexpected changes in the supply of a product or commodity – have
severely crippled China over the past few months with effects to slowly ripple
globally. Let’s start with China and from there analyze the global impact.
China is the world’s manufacturing superpower, accounting for nearly 30% of
global manufacturing output, combining with the United States (17%), Japan
(7%), Germany (5.8%), who are collectively responsible for nearly 60% of total
global manufacturing output.[4]
In terms of trade routes and
how these products reach the rest of the world, 80% of the world’s trade passes
through the South China Sea, with China home to seven of the ten busiest ports
in the world. The troubling statistic stands at the reality that over the past
three months, major Chinese ports have been operating at 20 – 50 % below
standard capacity with storage facilities reportedly already more than 90% full,
back in mid-February.[5]
Additionally, there are approximately 200 container ships that cross the
pacific between China and North America each month, and as of March 5th,
Containership operators had already canceled more than 20% of all sailings across the
Pacific for the entire first quarter, with many more to possibly come. This also means that there are fewer ships that can make
the return trip from North America, and the movement of goods is stalled even
further. This doesn’t include all the container ships forced to idle, which was
approximately two million containers of shipping capacity, which, if the
largest ships at sea can hold 20,000 containers, translates to a minimum of 100
ships not operating, waiting for their next destination. This is higher than the
1.5 million containers, or a minimum of 75 ships under the assumptions that
were idle at the peak of the 2008 recession.[6]
[7] Aplhaliner, a Paris maritime-based marine data provider, in February alone also reported that, "30 – 60% of weekly outbound capacity has been withdrawn from Asia – Europe and Transpacific trade as well as from intraregional routes." There have also been significant disruptions in the airways. Due to the severe
restrictions on the seaways, air cargo pricing had reached abnormal highs and
that U.S. – China cargo rates had risen 27% since March 3rd. The
United States has steadily canceled incoming flights from China over the past
month, contributing to the rise in prices and restrictions on the supply chain.
Still, Donald Trump's new 30-day travel ban on all flights from Europe poses an
even greater threat. While claims by governments state that specific air
freighters will not be affected, 60% of trade between the two countries is delivered
via airline passenger jets. With the United States being the E.U.’s largest export partner
of E.U. goods (18%) and 2nd largest import partner of E.U. goods
(12%), totaling $1.3trillion in 2018, this
is now a link in the supply chain that will be completely severed for the next
month.[8]
According to the Institute for Supply Management (ISM) the oldest and largest supply chain association in the world, 75% of companies are seeing capacity disruptions in their supply chains as a direct result of Coronavirus related transportation restrictions. CEO of ISM, Thomas Derry, released a statement last week saying that " for majority of U.S. businesses, lead times have doubled, and that shortage is compounded by the shortage of air and ocean freight to move product to the United States—even if they can get order filled...companies are faced with a lengthy recovery to normal operations in the wake of the virus outbreak."[13] Thus, the economic implications of these supply chain restrictions could
be extremely detrimental, as losses could increase exponentially as the shutdowns expand and closure times extend, sending shockwaves throughout global economies.[9]
Regarding
the supply chain, there are two more important factors to consider. Supply chains
are frozen globally and stockpiles are depleting, in order for supply chains to be restored all distribution channels will need to be reopened. While China has
lain dormant for most of February and March, some reports say activity has
started to pick up, but this fact alone will have minimal impact. While the
rest of the world, such as Italy, France, and the United states lockdown for at
least the next 30 days, these distribution channels will still be closed
regardless of whether China can produce or not. Therefore, while they may have
a slightly increased ability to produce, the goods will have nowhere to go. The
reality is that global supply chain restoration will only occur once countries have fully
contained, controlled, and reopened their economies, but when will this be?
Focusing on the United States, it
is crucial to understand the role in which the supply chain plays in the
medical response to the virus and how disruptions could lead to a potential
spiral effect. To contain, treat and control the spread of COVID – 19, medical
supplies are an essential weapon in each country’s defense. The director-general of the World Health Organization, Adhanom
Ghebreyesus told reporters that, "the world is facing severe disruption in
the market for personal protective equipment," and that backlogs have been
reported for four to six months, with demand 100 times higher at prices 20
times higher than average. Already two weeks ago, the New York health
department released a statement saying they are "aware that some
hospitals, EMS agencies, and other providers are experiencing shortages of N95
respirators." In regards to rural areas, CEO of Western Wisconsin Health,
Alison page, said, "we don't have stockpiles of anything." To make
matters worse, she said they have also "heard from other hospitals that
people are coming in the doors and stealing," medical supplies that the
hospitals do have. According to Dr. Scot Lindquist of
Washington State, a doctor on the frontlines fighting the Coronavirus, “The state desperately needs N95 masks, gowns, and gloves
brought into the community.”[10]
Problematically, according to National Geographic, China manufactures roughly
30% of the world's medical and pharmaceutical supplies, and the United States
imports 8.3 trillion dollars from China, nearly three times more than the second-largest
importer of pharmaceuticals and medical equipment from China. The most
vital and scariest medical statistics are more likely the following: 97% of all
antibiotics in the United States come from China, according to a study done by
the Department of Commerce. While the Coronavirus has only recently witnessed a
potential vaccine be developed in Canada, which still needs to undergo
significant testing, the FDA announced two weeks ago on February 28th,
the first drug shortage due to the Coronavirus. Furthermore, for nearly a
month, the Center for Disease Control (CDC) has warned about the fragility of
supply circuits for personal protective equipment, as manufacturers struggle to
meet orders for face masks and N95 respirators. So much so that the United
States has already tapped into the government’s secret Strategic National
Stockpile (SNS) which according to the Department of Health and Human Services
website is the “largest supply of potentially life-saving pharmaceuticals and
medical supplies for use in a public health emergency severe enough to cause
local supplies to run out,” and are kept at unknown locations. More analysis
shows that based on a series of models built and published in papers by the CDC,
the scenario being replicated, is very similar to the Coronavirus. According to
Eric Toner, a senior
scientist at the Johns Hopkins Center for Health Security, the CDC models provide "In terms of the amount of masks, gowns, gloves, [and] respirators.....
a good way to estimate," the level of preparedness needed to combat an
emerging respiratory pandemic. The scary reality is that based on these models,
“U.S. health care workers would need two to seven billion respirators for the
least- to most-severe possible scenarios. That’s up to 233 times more than
what’s currently in the Strategic National Stockpile.”[11][12] While the sea lanes,
airways and manufacturing continue to sit in lockdown, supply chain channels
will only reopen when the virus is contained, but disruptions themselves will
cripple the response possibly shutting down economies for longer and longer, intensifying
the economic severity, consequentially leading to a downward spiral. Therefore,
the supply chain shortages and economic consequences which could prevail even
if contained, have the potential to cascade down to levels of economic and
health devastation possibly never experienced before.
Stayed tuned
for Coronavirus Economic Crisis Part 2 to be released next week addressing the
chances of a global recession and asking, how bad will it be?
Contact: Feel free to leave a comment or if you have a questions reach out to emergingeconomics@gmail.com.
References
ABC News. (2020, March 13th). Medical providers,
fearing equipment shortages, tap into secret national supply network. Retrieved
from
https://abcnews.go.com/US/medical-providers-fearing-equipment-shortages-tap-secret-national/story?id=69583927
CNBC. (2020, March 12th). ‘Circuit breaker’
triggered again to keep stocks from falling through floor. What you need to
know. Retrieved from https://www.cnbc.com/2020/03/12/stock-futures-hit-a-limit-down-trading-halt-for-a-second-time-this-week-heres-what-that-means.html
CNN. (2020, March 29th). Health care braces for
shortages of supplies due to coronavirus. Retrieved from
https://www.cnn.com/2020/02/29/health/fda-medical-device-mask-hospital-shortage/index.html
Eurostat. (2020, March 14th). International trade
in goods by mode of transport. Retrieved from
https://ec.europa.eu/eurostat/statistics-explained/index.php/International_trade_in_goods_by_mode_of_transport
Financial Times. (2020, March 13th). Global
shipping market reels from coronavirus. Retrieved from
https://www.ft.com/content/9f543f48-4d96-11ea-95a0-43d18ec715f5
Fortune. (2020, March 11th). 75% of companies report coronavirus has disrupted their supply chains. Retrieved from https://fortune.com/2020/03/11/75-of-companies-report-coronavirus-has-disrupted-their-supply-chains/
Fortune. (2020, March 11th). 75% of companies report coronavirus has disrupted their supply chains. Retrieved from https://fortune.com/2020/03/11/75-of-companies-report-coronavirus-has-disrupted-their-supply-chains/
MarketWatch. (2020, March 12th). The Dow just
tumbled into a bear market — here’s how long those downturns last on average.
Retrieved from
https://www.marketwatch.com/story/the-dow-just-tumbled-into-a-bear-market-ending-the-longest-bull-market-run-in-historyheres-how-those-downturns-last-on-average-2020-03-11
Max Roser, H. R.-O. (2020). Our World In Data.
Retrieved from University of Oxford: https://ourworldindata.org/coronavirus
National Geographic. (2020, March 3rd). U.S. has
only a fraction of the medical supplies it needs to combat coronavirus.
Retrieved from https://www.nationalgeographic.com/science/2020/03/us-america-has-fraction-medical-supplies-it-needs-to-combat-coronavirus/#close
New York Times. (2020). How bad will the
Coronavirus get? Retrieved from
https://www.nytimes.com/interactive/2020/world/asia/china-coronavirus-contain.html
Statistica. (2020, Feb 18th). China Is the
World's Manufacturing Superpower. Retrieved from
https://www.statista.com/chart/20858/top-10-countries-by-share-of-global-manufacturing-output/
TechCrunch. (2020, March 13th). Stocks sharply
rebound as markets rally on expectations of government bailout, testing.
Retrieved from https://techcrunch.com/
The Real Deal (New York Real Estate News). (2020,
March 12th). Backorders and low supplies: Contractors look for workarounds
to supply-chain issues. Retrieved from
https://therealdeal.com/2020/03/12/backorders-and-low-supplies-contractors-look-for-workarounds-to-supply-chain-issues/
TIME. (2020). The WHO Estimated COVID-19
Mortality at 3.4%. That Doesn't Tell the Whole Story. Retrieved from
https://time.com/5798168/coronavirus-mortality-rate/
WSJ. (2020, March 5th). Coronavirus Snarls
Trans-Pacific Shipping and Ripples Through U.S. Business. Retrieved from
https://www.wsj.com/articles/coronavirus-snarls-trans-pacific-shipping-and-ripples-through-u-s-business-11583432172
WSJ. (2020, February 27th). Shipping’s Smaller
Operators Are Most Susceptible to the Coronavirus Financial Impact.
Retrieved from
https://www.wsj.com/articles/shippings-smaller-operators-are-most-susceptible-to-the-coronavirus-financial-impact-11582799403?mod=article_inline
WSJ. (2020, March 12th). U.S. Travel Ban Is
Expected to Snarl Trans-Atlantic Airfreight. Retrieved from
https://www.wsj.com/articles/u-s-travel-ban-is-expected-to-snarl-trans-atlantic-airfreight-11584040963