In the last week of February, South Korea, Iran, Japan, and Italy confirmed uncontrolled outbreaks of the coronavirus, followed by multiple other cases in the United States and Germany that couldn’t be clearly traced. Now, new infections outside China outpace those within. This strongly indicates that the virus has slipped out of control, despite the often extreme measures to manage it taken by the governments of affected countries.
These latest developments herald further changes for businesses and the global economy in which they operate. Financial markets around the world have gone into free-fall. Some experts predict that Australia, Germany and China are already in recession, and that the United States and several of the world’s other top economies are on the brink. Australia’s GDP per capita has already been shrinking, and the country is expected to officially go into a recession at the end of the second quarter. Businesses, for their part, should prepare for tough times.
Virus spread is causing both demand and supply shocks
As the coronavirus has spread, consumers, governments and businesses have reacted. Governments have restricted travel to and from affected areas, and stopped the free flow of goods in some cases, disrupting supply chains. Many businesses in affected areas, particularly in China, have shut down some of their operations, potentially leading to supply shortages in industries that rely on Chinese manufacturers.
Consumers, however, are likely to have the greatest impact on the global economy. As new cases are confirmed, people are increasingly opting to purchase essentials, stay home, and to avoid interaction with the public. In China, automobile sales plummeted by over 90 per cent in February. In Italy, the Venice Carnival, several football matches, and Milan’s fashion week were cancelled or virtually unattended, clearly illustrating the effect that fear can have on consumption.
Consumers all over the world can expect to feel the effects of interrupted supply chains, while falling consumer demand in the affected countries will, in turn, further impact businesses.
Economies are being slowed down
With governments directly cutting off travel, interfering in trade, and shutting down public events, it’s taking businesses longer, and costing them more to produce products and services. At the same time, it’s making it more difficult for consumers to access goods. From an economic standpoint, this hurts everyone. Low consumer spending cuts into business revenues, which will likely force them to begin to lay off workers — who are also consumers. Those consumers are then forced to tighten their belts further, creating the vicious cycle of a recession.
The threat of a global recession, while real, wasn’t seen as immediate or inevitable until now. The UK, Germany, Australia, and China were considered vulnerable, however all appeared to be holding on. Now, though, some experts suggest that recession is already here for some countries, while others, such as the United States, are standing on the edge.
Are we already in recession?
Clear data on whether we are already experiencing a recession doesn’t exist yet, however, some experts are sounding the alarm. The economics editor of The Australian, Adam Creighton, stated on 25 February that he is “almost certain” that Australia is already in recession. Similarly, Vice Chancellor Alex Frino of the University of Wollongong indicated that only a “black swan” event could save Australia from going into recession this year.
After multiple consecutive months of crises impacting the economy, it’s very likely that the country will report negative growth in the first quarter. Going forward, it appears that the coronavirus will hamper global trade; specifically impacting Australia’s largest trading partners (China, Japan, the United States, and South Korea). Slowdowns in these massive economies will directly drive down demand for energy resources and industrial exports like iron and copper, which make up the bulk of Australia’s exports.
What businesses can do to prepare
Regardless of whether the economy is already shrinking, businesses should prepare for tough economic times. That, first and foremost, means getting control of cash flow, and streamlining operations to run as lean as possible. That means using financing tools like invoice finance and supply chain finance to prevent cash flow interruptions from impacting operations, and eliminating unnecessary costs and unprofitable projects to focus on the business’ core competencies and competitiveness.
As the coronavirus continues to spread worldwide, businesses need to find ways to adapt to both supply chain interruptions and unexpected shifts in demand. By boosting their financial flexibility, and developing innovative solutions to these problems, businesses can find ways to compete, and to grow — even as the economy as a whole slows down.