It is still too early to map out the full impact of the coronavirus (or COVID-19 as it is now called) on the global economy or on global tech markets. The disease has not yet run its course or been contained in China, and it could still pop up and spread in other countries. There is a remote possibility that it could morph into a global pandemic like the Spanish flu of 1918 that killed millions of people. But based on the experience of past natural disasters and epidemics like SARS, we think any economic and tech market impacts will be short-lived and localized.
The direct effects of COVID-19 are relatively small. Some 1,200 people have been reported as having died from COVID-19. That compares with the US Centers for Disease Control and Prevention’s estimate that 14,000 to 36,000 Americans will die in the 2019-2020 flu season (see CDC, 2019-2020 US flu season: Preliminary burden estimates).
The bigger impact comes from the quarantine of Wuhan and the Hebei province. That has shut down most economic activity in that area and closed factories, offices, retailers, and transportation in other areas. Some factories, including auto plants and tech production facilities, are starting to reopen, but at reduced levels.
For durable goods like computers and communications equipment, demand will be delayed but recover quickly. Sales of durable goods that might have occurred in Q1 2020 will resurface in Q2 or Q3 when quarantines are lifted and production returns to normal. Of all the segments of the tech market, sales of computer and communications equipment are most likely to see this pattern. In other tech market sectors, SaaS subscription fees, telecom bills, and outsourcing fees will still be paid.
For nondurable goods and time-based services like air travel or consulting projects, demand will be delayed and may not recover. Food and agricultural products that can not be sold this quarter will be thrown away. Similarly, an airline seat that goes empty, an unused hotel room, or a consulting team that sits idle represents value that is lost forever.
China’s GDP will undoubtedly take a hit in Q1 2020. China’s real GDP growth had already been projected to drop below 6% in 2020. This crisis could cause its first-quarter GDP to actually drop. But assuming that the epidemic does not worsen, growth will likely bounce back in later quarters. Its tech market will likely see a similar pattern, concentrated in computer and communications equipment and tech consulting services, although less extreme because of the persistence of spending on software, outsourcing, and telecom services.
Other Asian countries will see modest negative impacts. Hong Kong’s economy, already reeling from ongoing protests, will track China’s economy. Japan, South Korea, Taiwan, Singapore, and other southeast Asian countries will suffer relatively minor slowdowns due to supply chain disruption.
Germany’s already weak economy could be hurt. Ironically, the economy most likely to be hardest hit by COVID-19 after China’s is halfway around the world in Germany. Germany’s economy posted zero growth in Q4 2019. The German auto industry, which makes up a large portion of the economy, has big exposure in China. A drop in Chinese auto production and sales will reduce the revenues of the big German auto companies in Q1 and maybe Q2, leading to belt-tightening. And weakness in Germany’s economy will hurt the economies of its neighbors (see the New York Times, “Coronavirus Begins To Sap Growth As Europe’s Economy Slows”).
The immediate impacts on the US economy or the US tech market will be small, but watch out for further strains on US/China relations. There may be some disruptions of supply chains, but overall the impact should be barely noticeable. Longer term, this event and the Chinese government’s response may accelerate the existing tendency of US firms to look for alternative locations for their supply chains outside of China. Or it could add ammunition to the Trump administration’s efforts to get US tech companies to cut their presence in and reliance on China.
Forrester is currently preparing our annual forecast for the Asia Pacific tech market, which will provide further analysis.
This post was written by VP, Principal Analyst Andrew Bartels, and it originally appeared here.
