As the threat of the COVID-19 outbreak continues to spread, centring on Hubei Province in China, the global economy is feeling the negative effects, as cities are put into lockdown, travel bans are enforced, and trade slows down.
Research by Allianz’s trade insurance arm Euler Hermes showed that the longer the outbreak goes on, the risks of supply chain disruption grow rapidly. According to a report by the insurer, several industries, such as chemicals, transport equipment, textile, and electronics, are particularly vulnerable to disruption from an extended pause in Chinese economic activity.
The insurer expects a global trade shock of US$26 billion per week due to the various lockdowns and restrictions put in place. This is likely to keep the manufacturing sector in recession throughout the first half of 2013. The following markets are also the most vulnerable to disruption due to their trade links with mainland China: Taiwan, South Korea, the Netherlands, Hungary, and Indonesia.
Furthermore, China’s year-on-year GDP growth could also suffer by as much as one percentage point, mostly over the first quarter of 2020. By comparison, during the SARS epidemic in 2003, China’s GDP growth took a two percentage point hit. According to Euler Hermes, the effect of COVID-19 may even be higher due to the Chinese economy’s higher dependence on private consumption today compared to 2003.
However, the report estimated that the Chinese economy can recover within one or two quarters, based on previous experience with SARS.
How can companies deal with the outbreak?
According to Imogen Page-Jarrett, research analyst for China at the Economist Intelligence Unit, companies must implement business continuity plans to mitigate the impact of the COVID-19 outbreak, which she does not expect to be contained until end-March under its baseline scenario.
Page-Jarrett cited a survey of Economist Corporate Network members across Asia between January 31 and February 06, which found that 76% of respondents reported a negative impact by the virus outbreak on their businesses, while 80% have or are working on a contingency plan.
“When planning, we recommend that companies be flexible in their approach in order to protect revenue by switching to alternative product lines, sourcing alternative suppliers and focusing on regions exempt from strict quarantine measures,” she said “Financial departments will need to revise budgets for 2020, taking into account a drop in Chinese demand in the first quarter of the year, while still needing to meet operational costs. Human resources departments should support flexible working hours, and working from home, where possible during the public health emergency, while also complying with legal requirements to ensure the health and safety of staff.”
Meanwhile, Matthew Wells, regional market management, commercial underwriting, and distribution director at Euler Hermes Asia-Pacific, stressed the importance of trade credit insurance (TCI) in safeguarding international trade during events such as the COVID-19 outbreak.
“TCI provides two crucial functions at such a time – firstly, due to our extensive proprietary risk knowledge, we are able to support our customers in making real time credit management decisions,” Wells said. “Having several insured suppliers (across different trade sectors) to any specific ‘debtor’ gives Euler Hermes a 360-degree view of the whole supply chain. This allows us to notify our customers when other suppliers are not being paid on time, or allowing our customers to supply safely on credit terms ahead of uninsured competitors.
“Secondly, Euler Hermes is there to pay claims when the worst happens in the case of an insolvency. We see so called ‘blue chip’ companies get into financial difficulty all the time, and this is where the pure insurance aspect of our business is important. With the coronavirus creating business uncertainty, there has never been a greater need for one’s largest asset on the balance sheet to be insured by TCI.”
