Covid19, or the need to adapt

Published at 05/03/2020

Three months after the appearance of covid-19, the first consequences are being felt on the world economy. Global prediction of 3.3% growth in 2020, according to IMF calculations, may not be as strong as expected. While financial markets are showing signs of weakness, some commentators are already pointing to downside risks in some countries, such as Italy. In China, despite the absence of clear figures, the repercussions on economic activity are well and truly real, and the contagion to other Asian countries seems to be confirmed. For example, Japan has also announced that its economy may well undergo a recession.

The French economy is obviously not spared. The Minister of Economy and Finance, Bruno Le Maire, estimates that the forecasted growth rate will eventually have to be revised downwards by 0.1 point in 2020, while the health crisis seems to be just beginning. Patrick Artus, chief economist at Natixis, believes that the situation could be much more difficult. According to him « a simple 10% decline in Chinese trade means about 0.3% less growth in Europe ».

The crisis threatens many sectors, starting with the tourism industry. With 2.5 million travelers each year, the industry is already anticipating a 30 to 40% drop in Chinese tourist visits this year, particularly in the Paris region, Burgundy (Bourgogne) and the French Riviera. But travelers from other geographical areas will also be affected. According to some estimates, this drop in visits could cost our country up to 2 billion euros in tourism revenues. The ability of public authorities to anticipate this shock will be decisive in limiting the impact on the real economy...

Very concrete consequences for companies

Since the financial crisis of 2008, the financial markets have not experienced such panic. The multiplication of cases of coronavirus in the world has gradually depleted investor confidence in the trading rooms, with losses recorded around 12-13% since February 24 on Wall Street and the major European stock markets. Christian Parisot, chief economist at Aurel BGC, rightly explained a few days ago that the coronavirus was now a shock to the economy, given the upcoming decline in corporate earnings.

Progressively, several large companies have published estimates of the costs of this epidemic on their business. Schneider Electric anticipates a ”negative impact of 300 million euros” on its first quarter revenues. The French household appliances giant Seb expects a loss of 250 million euros in sales in the first quarter of 2020. This is also the case for the world's number two water and waste management company Suez, which estimates its losses at 30 to 40 million euros. And the phenomenon is still in its infancy: the deputy president of Medef, Patrick Martin, said last week that the real challenge was the ”duration of the disruptions”: there is such an interweaving of economies, such a weight of subcontracting that it will take months to get the system back up and running without a hitch.

The coronavirus: an unexpected game changer

It would be as long as it is pointless to list all the consequences that a prolonged crisis could cause: stockpiling, violent market stabilization, shortages, etc. Faced with these different scenarios, companies are already taking action. Some pharmaceutical companies, particularly those with a presence in China, have already announced that they are considering relocating their production in order to guarantee the delivery of their products in the event of a crisis. The video game industry, on the other hand, which is very present in Asia, is redoubling its efforts to relocate some of its long-awaited products. Coronavirus has become a systemic risk and also does not affect small and medium-sized businesses and ETIs.

Beyond these crisis adaptations, pressed by the urgency of the situation, the idea of relocating certain activities over the longer term is beginning to merge and make its way. The extreme supply tensions that are crippling the electronics industry are leading some companies to consider reorienting their production strategies. Distributors and manufacturers had already adapted by building up stocks after the first few cases. Now, they are reducing their dependence on China, chosen primarily for production costs, by setting up shop elsewhere.

No doubt, other industrial sectors will follow. Of course, the adaptation of value chains will not happen quickly, nor without cost. But faced with a phenomenon of such magnitude, economic players have no choice but to adjust their strategies and visions, by integrating new parameters. For anticipation requires true flexibility, in order to be able to take into account all the events, and even more so, the unpredictable ones. Given the inherent weaknesses of a very deeply globalized economy, where strong interdependencies act as transmission belts for exogenous shocks, adaptation still remains the key.