Coronavirus Update: Economic Impact & Supply-Chain Challenges
The coronavirus outbreak is first and foremost a global tragedy, affecting hundreds of thousands of people worldwide. More than eleven weeks have passed since the virus known as SARS-CoV-2, causing the COVID-19 disease, was firstly reported to the World Health Organization (WHO). During these weeks the virus have been spreading rapidly worldwide, affecting the global healthcare systems, resulting in a growing impact on the global economy as well as huge supply-chain disruptions.
The virus was identified in the city of Wuhan and quickly spread throughout China. The country has experienced a deep humanitarian challenge, with more than 80,000 cases and deaths exceeding 3,000. The virus progressed quickly beyond China’s borders and have now been spreading quickly throughout four other major regions across the world: East Asia (especially South Korea), the Middle East (especially in Iran), Europe (especially Italy), and the United States. This is regions where millions of people travel every day for both social and economic reasons, which makes it difficult to prevent the spread of the disease.
Apart from the tragic human consequences of the epidemic, the economic uncertainty it has sparked will likely have a huge impact on the global economy in 2020. In general, there are three broad scenarios which might unfold due to the outbreak of the virus. A rapid recovery, a slowdown in the economy, and a pandemic-driven recession.
Supply Chain Challenges
Virtually, every global company has indicated that the coronavirus is disrupting their supply-chain in some way or another. However, the supply chains have begun to recover from the effects of the virus in China as “The World’s Factory” is picking up its speed again.
Since the outbreak started eleven weeks ago, one of the biggest concerns for most companies has been the effect on supply chains that begin in or go through China. As a result of the factory shutdowns in China during the first quarter, many disruptions have been felt across the supply chain. Even though China is picking up its speed again, the full effects are still not clear.
Talking to industry experts and supply chain managers, many large companies are currently running their operations at more than 90 percent capacity, and are soon to be back at 100 percent, as of March 11th.
According to the Ministry of Transportation’s newest joint report with several industry associations, around 70% of the nationwide trucking capacity have been restored. However, the demand of road transportation is yet to match the current supply. Goods are facing delays of between eight and ten days on their journey to seaports.
The Baltic Dry Index (BDI), which reflects the cost of moving raw materials by ship freight around the world, have dropped about two-thirds since the start of December and are significantly below the average level of the past 20 years. If the BDI does not recover in the upcoming months, it will indicate a severe negative effect on the global supply chain according to industry analysts.
In the next few months, when the Chinese manufacturers are getting back to full capacity, the most critical area of business is to secure all critical components and materials. The effect of the parts shortage is likely to become the new reason why plants in China cannot operate at full capacity and the full effect of this will not show until Q2 or Q3 this year. Furthermore, global factories that depend on Chinese output (which is most plants around the world) have not yet experienced the full impact of the initial shutdown during Q1 in China and are likely to experience inventory and parts shortage in the coming weeks.
In conclusion, the full effect of the virus outbreak is yet to be discovered and the biggest challenges still lies ahead. What is clear is that the coronavirus crisis is a global tragedy, affecting hundreds of thousands of people worldwide. All companies will need to act instantly in order to address business challenges and mitigate the risks in whatever ways they can.
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