Without a doubt, the novel coronavirus will impact the Canadian automotive sector and its economy. Dealers should expect a high level of disruption.
As I am writing this column, the novel coronavirus (COVID-19) has spread to more than 100 countries outside of China, and infected more than 125,000 people with multiple cases here in Canada and in the United States.
It has left health authorities around the world scrambling to contain the spread and has caused upheaval in financial markets, disrupted supply chains, and weakened global economic growth outlook for 2020.
This new outbreak may bring a feeling of déjà vu with the 2003 SARS epidemic. However, medical data indicates that the current strain of coronavirus is far more contagious, and the human and economic implications will be more far-reaching.
While the epidemic epicentre of SARS and COVID-19 is China, the East-Asian nation has moved from the sixth-largest economy (accounting for only 4 per cent of global GDP) to the second-largest economy after the U.S, encompassing more than 16 per cent of the world economic activity between 2003 and 2019. Therefore, any slowdown in the Chinese economy has the potential to send waves across the world.
It is estimated that in Canada, the temporary disruption from the rail blockades coupled with the implications of COVID-19 will reduce GDP by a few percentage points in the first half of the year, at least.
It is still too early to fully capture the extent of the economic impact of COVID-19 on the Canadian and North-American economy. Much of the economic weakness has so far been concentrated in China.
The impact will be greater if the outbreak is not rapidly contained, and also if the Chinese economy remains at standstill for a longer period of time due to the containment measures. That said, the risk of a recession triggered by the coronavirus in Canada and the U.S. remains low at this point.
It is estimated that in Canada, the temporary disruption from the rail blockades coupled with the implications of COVID-19 will reduce GDP by a few percentage points in the first half of the year, at least. This is not to downplay the impacts of the virus. The economic effects would have to spread beyond sectors (such as manufacturing, tourism and travel) that are directly affected by the outbreak to trigger a recession.
A recession is not just a dip in GDP as commonly defined. It is a vicious cycle that feeds on itself — economic downturn fears lead to less spending and more saving, which leads to job losses, then to less spending, which leads to even more job losses and so on.
Consumer spending has been the backbone of the decade-long economic expansion around the world. As long as consumer spending in other industries does not drop significantly, a recession can be avoided outside of China.
The Fed has already taken the extraordinary preventive step to cut rates in order to contain the economic damage of the pandemic in the U.S.
The Bank of Canada also moved to cut interest rates to mitigate the impact of the outbreak on our domestic economy. While monetary policy is only one solution to this complex issue, interest rate cuts will help spur consumer spending and boost business confidence.
For the auto industry, production and global supply chains have been disrupted as a result of the outbreak. Factory closures and quarantine workers have taken a toll on the industry beyond the borders of China, as shortages in supplies stall vehicle production around the world.
For example, OEMs such as Hyundai and Kia stopped production at several assembly lines in South Korea. Nissan is contemplating suspending production in Japan and General Motors suggested that production outages could affect plants in the U.S.
Here in Canada, there may be shortages in certain models and parts in the short-term until the outbreak is fully contained.
There may be a temporary surge in the economy and the auto market after the risk of the disease is mitigated and the affected industries resume normal operations.
However, it will take time for the world to recover and economic activity to go back to expected levels. Beyond the economic repercussions of COVID-19, this is a deplorable human tragedy and it is the hope that the containment measures and other policy responses adopted by countries around the world, particularly China, will help limit the spread of the virus and save lives.
