By Richard Li
While the number of COVID-19 cases in China is on the decline, there has been a drastic increase globally and various governments are scrambling to put together contingency plans to contain the coronavirus spread within their respective territories. The immediate fallout of this viral outbreak is the slowing down of global economic activities. To make matters worse, failing to control and contain this coronavirus can potentially lead to a global recession.
As for Africa, there are now at least 99 confirmed cases in nine countries with Egypt having the most cases, according the World Health Organisation (WHO) data, as of March 10th. While some African countries have suspended flights from China and blocked/put in quarantine travellers from there, most of the imported cases seem to be coming from elsewhere. Unfortunately, with this outbreak, the African continent is being hit by a double whammy with demand and supply shocks, that will definitely impede the recovery of the larger economies in the short term. Even if the number of COVID-19 cases in Africa is still relatively low, the impact on African economies should already be felt by now.
COVID-19 impact on the global outlook
The main finance news headlines are currently being monopolised by some of the major consequences of the coronavirus outbreak, like Brent crude prices crashing by about 24% to hit below $35 on March 9th as well as the American stock market index, the Dow Jones Industrial Average, slumping by more than 2,000 points and down by about 20% since its February 12th closing peak. However, since 2017, the global economy was already on a steady decline with major economies like China, Europe and Japan slowly decelerating. Even the American economy is also slowing down, after being boosted by the tax cuts from the Trump administration in 2018. Now with the spread of the coronavirus, the global economic outlook is looking grim and this is indeed not good news for the African continent.
Both the World Bank and the International Monetary Fund (IMF) are revising downward their global growth estimates. As a result, the African continent will not be spared and will definitely be hit hard if the COVID-19 outbreak eventually becomes a pandemic. Besides China, all other major economies that are Africa’s major trade partners, are not in any better shape. In Asia, the Japanese economy shrank by 7.1% in the fourth quarter of 2019 and is on the brink of a recession, whereas South Korea is not only trying to stimulate its economy with nearly $10 billion, but also battling a major outbreak of COVID-19 within its territory. Even growth in India, a major economic partner of Africa, decelerated to stagnate at around 5%.
As for the European Union (EU), its economy is stalling and risks falling into recession with its top three economies – Germany, France and Italy – stagnating and barely growing. In the last quarter of 2019, Germany barely grew while both France and Italy contracted. Adding on to its economic woes, Europe is experiencing a rapid increase of coronavirus cases and Italy is now under lockdown. For the United States (US), the Federal Reserve cut interest rates three times in 2019, 25 basis points each time. In addition, even if the US central bank did an emergency rate cut of 50 basis points at the beginning of this month to prevent an economic slowdown, the financial markets are expecting more drastic cuts. As IMF chief Kristalina Georgieva warned last October, the global economy is experiencing a synchronised slowdown. Making matters worse with COVID-19, a global recession may even happen. With no doubt, African economies will also be sucked into this maelstrom of global events, that will affect them negatively.
African exports affected by global slowdown
China is the largest trade partner of the African continent. The latest economic data from China shows that its purchasing managers’ index (PMI) for manufacturing and services sectors collapsed to 35.7 and 26.5 respectively in February (a PMI reading below 50 indicates contraction). Moreover, due to supply chain disruptions with the coronavirus outbreak, the Chinese exports fell by a significant 17.2% over the first two months of this year. Chinese imports also fell by 4%. In the short term, China is facing a slump in its growth and is also struggling to rev up its economic engine. As a consequence, Africa will face a twin shock of a declining demand for its commodities used in Chinese manufacturing as well as more expensive Chinese products.
With the Chinese government extending the Lunar New Year holidays as well as locking down the Hubei province and many other affected areas, it has created a domino effect within the global value chains. China is now a global manufacturing hub and the repercussions of the extended manufacturing shutdown are estimated to reach a $50 billion drop in global exports in February, according to the analysis by the United Nations Conference on Trade and Development (UNCTAD). The top three most affected economies are the EU, the US and Japan with an estimated output decline of $15.6 billion, $5.8 billion and $5.2 billion respectively.
This means that the negative economic spiral affecting global manufacturing and trade will eventually impinge on the overall global growth, business confidence and investment. With the global slowdown, demand for commodities will drop and the financial markets are already re-pricing downward commodity prices. Being mainly a commodities exporter, the African continent will be hard hit. Except for gold, prices for most hard and soft commodities have declined over the last two months.
Ebola economic impact and now COVID-19
Besides the economic costs, Africa will have to incur significant costs in dealing with a potential COVID-19 outbreak within the continent. An important amount of funding will be required to deal directly with a public health crisis in terms of mobilising doctors, healthcare workers as well as needing the necessary medical infrastructure, including lots of medical and safety equipment.
Africa is indeed familiar with deadly viral outbreaks with the ebola virus. The biggest ebola outbreak in 2014-2016 affected mainly three west African countries – Guinea, Liberia and Sierra Leone – infecting 28,610 people and causing 11,308 casualties, according to the WHO. Besides the human costs, the direct economic impact on these three countries was estimated to be $2.8 billion by the World Bank. With ebola in the headlines, the whole African continent also suffered from intangible and incalculable losses with Africa being perceived as a high risk investment destination.
As for COVID-19, there is no doubt that the virus will continue on spreading further in Africa and globally. While African countries should remain vigilant and not fall in panic mode, they must already start taking all precautionary measures to detect and isolate suspected cases, especially at border areas. Doing so, Africa will not only be able to avoid major coronavirus outbreaks, but also mitigate any potential economic losses.
Richard Li is a Partner with STEEL Advisory Partners, a management consulting firm that serves clients across industries. Having spent his working career in strategy consulting, he worked with various global clients and covers themes such as corporate strategy, transformation, digital innovation and risk management. He is an avid observer of world affairs and emerging markets, particularly the African continent.