Editor Andrea Fiano's monthly letter to you, the reader.
MARCH 2020 | VOL. 34 NO. 3
At present it is difficult to clearly understand the current effects on the global economy of the coronavirus now named Covid-19, and it is impossible to forecast its future impact. The heavy toll on human lives and the disruption of economic activity, primarily in China but elsewhere in Asia too, are evident and dramatic. But there are also long-term effects that are hard to assess, since we do not know yet the magnitude or the duration of the contagion. Some have raised the prospect of recession—global, regional or local to China—while others remain focused on the potential return of inflation. A number of central banks, particularly in Asia and emerging markets, have already lowered interest rates, and many expect more cuts in the weeks and months to come.
In this issue, we focus on Covid-19’s initial impact on the global supply chain. Basic economic theory suggests its effects won’t show up in economic data for a few months, as companies that rely on subcontractors in China and the Asian region work through existing supplies. Long term, this incident may inspire a decrease in outsourcing in favor of onshoring, and a further increase of inter-regional trade. But it is too early to assess that. And there is much more to keep an eye on, such as the effects on travel and tourism. Or the drop in global commodities demand due to the China slowdown.
This brings us to a simple initial conclusion: All the generally rosy forecasts issued last year for 2020 were based on assumptions that no longer hold. Covid-19 could not be part of the forecast back then, but it is crucial right now. With Apple issuing a profit warning tied to the virus, we are seeing the first concrete economic consequences. It is logical to expect more such announcements in the coming earnings season. The physical damage of the newest coronavirus might—hopefully will—be contained soon. The economic impact, in the era of globalization, will be widespread and possibly long-lasting.