LONDON, United Kingdom — After enduring weeks of mandated quarantine, Chinese shoppers are slowly repatriating luxury malls. Some of the country’s manufacturers, hit hard by nation-wide lockdowns, are seeing workers return to their posts as infections drop in the first country struck by Covid-19.
The news should be a relief for the global businesses, which have seen plummeting sales and disrupted supply chains in the world’s second biggest economy hit their bottom lines. But in China, businesses’ woes are far from over.
The pandemic — which has infected over 203,614 people and killed 8,226 as of March 18 — has already made a staggering impact on global companies’ financials. Investment banking firm Cowen predicts that Nike’s revenue could fall by a third in their fourth quarter, while H&M Group, which shuttered 334 out of 518 mainland stores during the virus’ peak — reported a 24 percent drop in Chinese sales during the first quarter.
China may have entered recovery mode, but countries like the US, France, Italy and the UK are only just beginning to feel the heat from government lockdowns and sluggish spending. With more reported cases of coronavirus outside mainland China than within the country, experts now expect an economic fallout of a similar magnitude to reverberate through western markets as the virus spreads.
For brands like H&M, which has temporarily shuttered stores in Italy, France and Spain, a decline in sales from China could be the first of many across global markets.
“The US and Europe are about a month or so behind China epidemiologically speaking, but also economically,” economist George Magnus wrote for Barron’s. This makes sense given that policies adopted by governments in the US and Italy are now mirroring Beijing’s from January.
Looking for Clues in China
Though most of Zara’s stores in China have now reopened, owner Inditex, which released full year results on March 18, wrote down almost €300 million ($335 million) of its Spring/Summer inventory with coronavirus in mind. The group has already recorded a 24 percent drop in sales over the past two weeks due to store closures across Europe.
Prada announced its full year results on the same day and warned of a negative impact on performance for the year ahead due to the pandemic.
Official data from China for the first two months of 2020, released this week, paints a stark picture of what other markets are up against. Industrial activity was expected to drop by 3 percent but instead declined by 13.5 percent during the period. Retail sales — forecast by Bloomberg to contract 4 percent — fell by 20.5 percent. Experts warned that March data won’t improve by much and that months of turmoil will result in a significant contraction in the country’s first quarter GDP.
Chinese firms still have inventory but we will see what happens after two months.
According to analysis by research consultancy Capital Economics, data suggests that China’s gross domestic product contracted 13 percent during the first two months of the year. Beijing has maintained an optimistic front. China’s National Bureau of Statistics expects the economy to pick up during the second quarter as people return to work and emergency measures like interest rate cuts kick into effect.
But "business as usual" will be no simple feat, even for a consumption and manufacturing powerhouse. While unemployment (up at a record 5.7 percent in February) is set to worsen consumer appetite, international lockdowns will reverberate back on the country’s supply chains and investment routes.
This will be felt particularly by automotive, electronics and apparel sectors due to their long and often convoluted supply chains, said Sun Xin, lecturer in Chinese and East Asian business at King’s College London.
“The effect [on manufacturing] is not felt right now as shutdowns in America and Europe just happened...Chinese firms still have inventory but we will see what happens after two months,” added Sun. “[Social distancing] has a huge negative impact on retail consumption, so from this perspective what happens in China is going to happen in all these other countries.”
Impact Shifts from Supply to Demand
However, Sun noted a key difference in how Covid-19 could play out in the west: Chinese bureaucracy and surveillance capacities allowed Beijing to implement self-isolation policies in a much more effective manner to keep the virus’ spread under relative control. “We now expect the pandemic to last much longer in Europe and the US compared to China,” he said. “Social distancing in China is way more effective than anywhere in the world.”
Sun also notes that there is some doubt as to the veracity of official data in the mainland, which could overplay the rate at which the country is recovering from the crisis.
Even so, businesses can expect obstacles arising in markets like the US to take a similar form to what they and local players are dealing with in the mainland. Magnus warned that in the west, virus mitigation measures will result in income loss for workers employed in hard-hit consumer sectors. Supply could lag behind as employees, like China’s manufacturing workers, are prevented (due to lockdowns and a lack of financial support) from getting to work.
Chinese firms are prepared for a long-term economic decline rather than a short-term shock.
As factories get up and running in China, there’s still the lack of demand to consider.
“Everywhere in the world, people are reducing consumption and investment. The demand for products will decline by a huge margin,” said Sun. While the Trump administration is proposing a $850-billion stimulus package to cushion the blow for American businesses, “it might not be enough,” Magnus added.
Ultimately, the pandemic’s indiscriminate nature means that recovery will be a global effort as experts seek to pinpoint "when" a recession will hit, rather than "if" it will happen at all.
“This is not going to end very quickly,” said Sun. “Chinese firms are prepared for a long-term economic decline rather than a short-term shock. They are still suffering from the lack of global demand.”
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