Page 7 - Food & Drink March 2020
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Outbreak: COVID-19
As COVID-19 spreads and governments plan for a pandemic, its economic damage also grows. When the world’s second-largest economy and leading trading nation is hobbled, the impact of lost revenue and disrupted supply chains are widespread and significant. Kim Berry writes.
THE coronavirus COVID-19 is spreading around the world. To date more than 90,000 people are infected and more than 3000 people have died.
From 27 February to
1 March, 21 countries reported their first cases.
Early optimism that containing the virus in China might see a relatively quick rebound, has given way to increasingly nervous markets and sectors, e.g. education and tourism, recording major impacts as COVID-19 spreads.
A Reuters poll of economists said China’s economic growth was expected to slow to 4.5 per cent in 1Q20, the slowest since the financial crisis.
ANZ Greater China & China markets chief economist Raymond Yeung said the bank revised its estimate on the impact of the virus because it was originally based on the initial assumption factories would resume production on 10 February.
But Yeung says from an economic point of view, the virus outbreak is, “an external shock rather than a structural issue. The impact should be one-off”.
Yeung said ANZ Research expects an economic rebound as the situation stabilises, but gauging the timing of it “remains difficult” and was “unlikely to be spectacular”.
On impacts to Australian F&B manufacturers, Rabobank Australia Food & Agribusiness Research and Advisory GM Tim Hunt said: “Wine is not perishable, but sales will be impacted for those that sell to the food service sector. Other sectors that might see growth include foods you eat at home, like instant noodles and other processed foods.”
Industries that rely heavily on selling into the food service
market in China, especially perishable items that require quick distribution, felt the effects almost immediately.
Hunt’s concern was if the virus continued for many months, becoming extensive and enduring, there would be a drop in wages, then a drop in the sale of premium F&B.
“It will go beyond logistical disruptions and food service sales to eventually impacting the consumption in general of meat, dairy, grains and seafood,” he said.
At that stage, the currency exchange rate would act as an “important stabiliser” for Australian agricultural exporters, with the Australian dollar likely to depreciate significantly as the market responded to slowing economic growth and rising risk concerns.
And this, Hunt said, would “somewhat offset” any fall in global commodity prices when expressed in local currency terms.
World Economic Forum head of Shaping the Future of Advanced Manufacturing and Production, Francisco Betti, said global value chains have been designed to optimise cost competitiveness, but COVID-19 underlines the need to also focus on risk competitiveness.
Betti said it was clear how the outbreak was disrupting manufacturing and global value chains with many CEOs, “scrambling to respond to urgent questions about how to protect their employees, ensure supply security, mitigate the financial impact, address reputational risks, and navigate market uncertainty, which is driving down demand”.
The International Monetary Fund puts China’s share of
global output at 19.7 per cent this year, more than double its 8.5 per cent share in 2003, during the SARS outbreak.
China has also accounted for 37 per cent of the cumulative growth in world GDP since 2008 and no other economy is stepping up to fill the void.
The risk of outright global recession in the first half of 2020 seems like a distinct possibility, it said.
Betti said: “Businesses should increase the visibility of value chains, shorten supply chains to be nearer to customers, leverage technologies and evaluate different scenarios.”
The availability of white- and blue-collar labour is severely limited, and strict quarantines in key manufacturing hubs continue to take a toll.
Jefferies Financial Group has predicted only 60-80 per cent of China’s 300 million migrant workers will be back by 2Q20.
Daily activity trackers compiled by Morgan Stanley China show at 20 February,
coal consumption (60 per cent of China’s total energy consumption) was 38 per cent lower the same time last year.
Nationwide transportation comparisons were even weaker, making it extremely difficult for China’s nearly 300 million migrant workers to return to factories after the annual Lunar New Year holiday.
“Leaders urgently need to deploy short-term strategies to become more resilient and make longer-term considerations that will reconfigure supply chains to protect against risks,” Betti said.
While China is the largest global exporter, it is also vital to global value chains (GVCs).
Yale’s School of Management senior lecturer and Jackson Institute of Global Affairs senior fellow Stephen Roach said recent research showed that GVCs accounted for nearly 75 per cent of growth in world trade and that China was the most important source of
this expansion.
China’s shock is a major
bottleneck to global supply, Roach said. ✷
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