A longer term consequence of the coronavirus crisis could be that it prompts moves to deglobalisation, according to the chief economist of global independent economic research firm Capital Economics.
In an article published on Capital's website, group chief economist Neil Shearing says looking "beyond the next year or so" one plausible consequence of the virus is that it could accelerate the process of deglobalisation that is already spreading through the world economy "and which we have previously warned about".
"One catalyst for this could be a political shift in China itself. Some commentators have speculated that, since the virus has undermined the popular belief that concentrating power in the Party is the best way forward for China, the Party may start to liberalise and relinquish control. This could, in time, push China and the West closer together," he says.
"But it’s equally possible that, once the virus is brought under control, popular feeling may start to shift again. Beijing may be able to make the case that the outbreak was only contained thanks to a strong centre. And if that happens, it could entrench China’s existing economic model and make further clashes with the US more likely in the future."
Shearing says a more immediate way in which the crisis could accelerate a process of de-globalisation is by adding to a growing pushback against large and complex supply chains.
"Up to now, the threat to supply chains has been viewed mainly through the prism of policy and technology. The US-China trade war, alongside Brexit, undermined the previous belief that free trade was an immutable pillar of the world economy. At the same time, new technologies such as 3D printing have enabled the re-shoring of some aspects of manufacturing production that were previously offshored to emerging economies. Both factors seem likely, in our view, to cause an increasing number of firms to question the benefits of maintaining large supply chains."
The coronavirus outbreak has highlighted another vulnerability in global supply chains, Shearing says.
"Many firms are now warning about an impending shortage of component parts caused by factory closures in China. Some have already announced production suspensions as a result. More will inevitably follow if the closures in China continue.
"It’s difficult to judge how the economic effects of the virus will play out over the next ten days, let alone the next ten years. But it’s possible that, to policy and technology, we may soon have to add the threat of global pandemics (and indeed natural disasters more generally) to the list of factors threatening the future of globalisation."
In terms of the short term, Shearing says the spread of the virus has created "a cottage industry" for economic forecasters.
"It is now all but certain that China’s economy will contract in quarter-on-quarter terms in Q1. We have pencilled in a fall in output of 2.5% q/q (-10% annualised) on our CAP measure in the first quarter. The more important question, however, is how quickly any lost output can be made up."