The UN Conference on Trade and Development (UNCTAD) is warning that the rapid spread of Covid-19 could impact global GDP by US$1-2tn over the course of the year, as details emerge of a sharp drop in Chinese trade activity in February.

“We envisage a slowdown in the global economy to under 2% for this year, and that will probably cost in the order of US$1tn, compared with what people were forecasting back in September,” says Richard Kozul-Wright, director of UNCTAD’s division on globalisation and development strategies.

Coupled with a collapse in oil prices – Brent crude dropped to under US$40 a barrel this week for the first time since 2016 – UNCTAD warns of a potential “doomsday scenario” in which GDP is hit by US$2tn and worldwide economic growth falls to 0.5%.

Its warnings far exceed estimates from the Asian Development Bank (ADB) that global GDP could be impacted by between US$77bn and US$347bn as a result of the outbreak. An ADB briefing published late last week says production in China likely fell to 50-60% of normal levels following the outbreak of Covid-19 in the country in late December, but has since shown signs of recovery.

“There have been substantial production disruptions as a result of forced business closures and the inability of workers to get to work, as well as disruptions to trade and business as a result of border closures, travel bans, and other restrictions on the movement of goods, people, and capital,” it says.

China’s status as “a global and regional hub” means many economies export a significant amount of intermediate goods to the country, while others use inputs from China in their own production. As a result, the ADB estimates a moderate-case impact of US$156bn on global GDP.

Its worst-case scenario – where travel bans and low demand remain in place for six months – is anticipated to cost the global economy US$347bn.

The development bank says there are signs production is “normalising” in the world’s most populous nation. The Chinese government’s statistics bureau said in a statement issued on February 29 that the epidemic has now been contained and that “the negative impact on production is gradually weakening”.

It adds that the return-to-work rate is expected to rise from around 86% to just under 95% by the end of March. New cases reported by the Chinese National Health Commission dropped to around 40 per day this week, the lowest rate since tracking started in January.

However, trade-related data suggest China’s trade activities endured a torrid start to the year.

Tradeshift, an open-source commerce platform that helps buyers and suppliers digitise trade, says the number of transactions processed across its network fell by 17% from January to February. Though Chinese New Year – this year on January 25 – usually results in a slowdown of trading conditions, the company says the situation worsened dramatically three weeks later.

“Week-on-week analysis reveals overall trade activity in the region fell by a remarkable 56% in the week commencing February 16 following a period of steady decline throughout January,” says Tradeshift, which is used by around 1.5 million businesses.

“Domestic supply chains were particularly badly affected, with orders placed between local businesses falling by 60%. The number of transactions between Chinese businesses and international firms dropped by 50% during the same period.”

Though China accounts for around two-thirds of the ADB’s forecasted impact, it says Hong Kong, Mongolia, the Philippines, Singapore, Taiwan and Vietnam are also likely to be “materially affected”. That is because China is a major destination for both final and intermediate goods and services.


Shipping hit hard

The global shipping industry has been sharply affected. Law firm Akin Gump says the sector “is losing approximately US$350mn per week due to Covid-19, and the effects of cancelled sailings and upended logistics are causing major issues in global shipping industry, such as a surplus of refrigerated containers stranded in China and short-supply elsewhere”.

Research by Windward, a Tel Aviv-headquartered maritime analytics firm, indicates a noticeable slump in the number of vessels calling at Chinese ports. Unique port calls fell from around 8,000 per week in January to under 5,911 the week after Chinese New Year – the lowest number in seven years.

“Looking at the 10-day average leading up to three days before Chinese New Year, and a 10-day average starting three days after the celebration, we see the real impact: while in 2014-19 the average drop was around 11-12% every year, in 2020 the drop was 30%,” the company said in a February blog post.

And San Francisco-based freight forwarding company Flexport says its data shows an increase of around 35% in the volume of shipped units after Chinese New Year, but points out that is “a far cry from 195% for the equivalent week in 2018 and 290% for 2019”.

Hong Kong-based lawyer Andrew Rigden Green, a partner at Stephenson Harwood, says he has heard “complaints from shipping clients that are holding cargoes that are ‘stuck all over the world’”.

“It is difficult for banks, particularly in Hong Kong, which are on government-recommended business contingency programmes such as limiting the number of staff in the office,” he tells GTR. “They are concerned bills of lading are not being endorsed and passed along the chain as quickly as before, and that cargo remains in ports because letters of credit are not being cleared.”

The International Chamber of Shipping (ICS) issued new guidance last week to help combat the spread of the virus, including advice on managing port entry restrictions and a plan for managing suspected cases of infection on board.

“Shipping is responsible for 90% of global trade and recognises its responsibility in helping tackle this global health issue whilst ensuring that the wheels of global trade continue to turn,” says Guy Platten, secretary general of the ICS.


Officials respond

Some authorities have already responded to the resulting squeeze on trading firms’ working capital. The International Finance Corporation (IFC) has expanded trade finance lines for banks in Vietnam, hit hard by the slowdown in Chinese production, and together with the World Bank has made US$18bn available immediately to help with the economic and health impacts of the outbreak.

The ADB, meanwhile, says it is supporting its members “through finance, knowledge and partnerships”. It has provided US$4mn regional technical assistance grants and a further US$18.6mn short-term loan facility to a pharmaceutical distributor in Wuhan, the city at the epicentre of the outbreak.

“A reallocation of existing resources is also taking place, as ADB has several health projects in the region totalling US$469mn and some of this can be reallocated in response to the outbreak,” it says. “ADB stands ready to provide additional support to [developing market countries] via countercyclical support programs, emergency assistance loans, and other instruments, if needed.”

Change could also be on the horizon in Europe. Incoming Bank of England governor Andrew Bailey told a government committee last week that measures would have to be taken “very quickly” to protect smaller businesses.

“We are collectively now going to have to provide some form of supply chain finance in the not too distant future,” said Bailey, who is due to take up the new role on March 16.

In France, finance minister Bruno Le Maire says he has ordered a review of where domestic manufacturers can strengthen their “economic and strategic independence” from suppliers in China, particularly in the pharmaceuticals industry.

The financial services sector is also being encouraged to lend its support. A recent research briefing by Oxford Economics encourages banks to “support hard-hit sectors with bridge loans, especially where they’re economically important”.

“Policymakers also need to talk to banks about not calling in loans to firms and households facing short-term cash crises and extending existing loan facilities without penalty,” it says. “Such moves would be especially useful given the large share of short-term lending in total loans and in particular for small and medium enterprises, which account for over 35% of lending in the OECD.”