The world faces an unprecedented economic shock from the spread of the Covid-19 coronavirus, presenting governments and central banks with a challenge they may be ill-equipped to meet.

When credit froze and confidence collapsed in the global financial crisis (GFC), central banks rode to the rescue with rate cuts that boosted the money supply and lifted consumer confidence.

But with China's factories and ports in shutdown, this crisis is delivering a shock to the global supply chain on a scale the world has never seen.

"The coronavirus outbreak is mostly a negative supply shock that reduces growth and increases costs and inflation, with some side-effects for aggregate demand," the famously gloomy economist Nouriel Roubini wrote in the Financial Times this week. "Monetary policy cannot resolve this."

On top of the normal slump in demand that ripples though economies when a downturn hits, the supply crunch means millions of businesses around the world are now facing shortages of everything from raw materials to high-tech components.

News stories around the globe have warned of shortfalls in iPhones, on the one hand, to ingredients for Diet Coke on the other.

There are fears that supplies of some pharmaceuticals such as antibiotics and heart medicines may run short.

Green energy production could also take a hit, given that many components for solar panels and wind turbines are produced in China.

According to the OECD, China now accounts for almost 20 per cent of global gross domestic product; it was just 6 per cent when the world faced the 2003 Sars epidemic.

It accounts for about 11 per cent of global trade, up from just 4 per cent 17 years ago.

And early modelling based on the scale of the Sars outbreak has long since become redundant.

In a report produced this week, the OECD said it expected global GDP growth to fall to 2.4 per cent this year from "an already weak 2.9 per cent".

It revised China's growth to below 5 per cent, from a previous expectation of 6 per cent.

"The adverse consequences of these developments for other countries are significant, including the direct disruption to global supply chains, weaker final demand for imported goods and services, and the wider regional declines in international tourism and business travel," the report said.

A masked woman examines the PCBs in an electronics factory in Suining city in southwest China's Sichuan province. Photo / Barcroft Media via Getty Images

In New Zealand, the rise of China as an export destination is a familiar story. We have a trade surplus with China, thanks to dairy, meat, logs and other primary products, as well as the many tourists and students who visit us each year.

Exports to China were worth more than $20.1 billion in the year to December 2019, according to StatsNZ.

But we are also now highly reliant on China for imports. At $13.3b, it is our largest source of imported goods and services, surpassing Australia.

China is now our number one source of electrical machinery and equipment, mechanical machinery and equipment, textiles, clothing, and furniture and fittings.

Many of those imports are the parts and equipment that local businesses and exporters need to keep their own production lines and sales divisions humming.

According to the Harvard Business Review, the peak of the supply crunch will hit in the middle of this month.

That's based on modelling of the scale of the shutdown in China and the way that modern businesses run inventory. Further complicating things, that inventory is a lot leaner than it used to be.

"We predict that the peak of the impact of Covid-19 on global supply chains will occur in mid-March, forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the US and Europe," wrote analysts Pierre Haren and David Simchi-Levi.

"The most vulnerable companies are those which rely heavily or solely on factories in China for parts and materials."

In New Zealand there are already anecdotal reports of companies struggling to get parts to complete orders. Many are reluctant to talk publicly for fear of spooking customers.

The Warehouse Group has warned that it will likely face eight weeks of delays to some goods produced in China, including art and craft supplies and some clothing.

So far, for most small and medium-sized business the supply situation is one of "concern but nothing catastrophic," says Brett O'Riley, chief executive of the Employers and Manufacturers Association.

O'Riley, who has spent the past week visiting business groups in the Bay of Plenty and Waikato, says manufacturers he talked to were increasingly concerned.

"This particular situation is so unusual because you've got so many businesses affected in so many different ways," he says.

So when it came to looking at government support for business, the problems weren't geographically defined in the same way as a natural disaster such as an earthquake or a drought.

The situation is varied, with highly specific issues for specific businesses, he says.
Some manufacturers are using a bit of Kiwi ingenuity.

"I talked to one that used to produce components themselves and then went to source them from China, and has gone back to producing themselves," he says. "So there are work-arounds."

Businesses may also shift production to other facilities in places such as Vietnam or the Philippines, but that takes time.

"The real concern I guess is when does China re-open again?" O'Riley says. "At this stage we're still hopeful, from the signs that are coming out of China, that it may have peaked there."

A masked woman works in a weaving factory in Hai'an in east China's Jiangsu province. Photo / Barcroft Media via Getty Images

While concerns continue to grow about the spread in countries such as South Korea and Italy, daily case numbers have been falling in China, suggesting that country may now be through the worst.

China has reported (as of Wednesday) decreasing numbers of new cases and increasing recovery rates, which has seen the number of active coronavirus cases fall for 15 consecutive days, to below 28,000.

How quickly China gets back to work from here will be a crucial part of the puzzle for economists trying to assess the scale of global disruption.

Some business analysts believe the country can be at close to normal production levels by the end of March.

But it is is a difficult balancing act and a challenge for the authorities, who can ill-afford to see another regional flare-up of the virus.

The South China Morning Post has reported that more than 90 per cent of state workers are now back on the job — under strict instruction from the Communist Party.

But the number of migrant workers returning to privately owned factories and businesses is much lower, suggesting China's output is still a long way from normal.

The Baidu Migration Index suggests just 40 per cent of workers are back on factory assembly lines.

Railway passenger numbers are still down more than 75 per cent from where they were a year ago.

Reports from big cities like Beijing and Shanghai suggest the streets and shops remain unusually empty.

This week China announced that its February manufacturing purchasing managers' index (PMI) had slowed to an all-time low of 35.7, confirming the sharp contraction in factory activity.

That is lower than levels reached during the GFC in November 2008, when the PMI dropped to 38.8.

Compounding things for businesses relying on Chinese goods is the trend for modern companies to run lean supply chains.

In the Harvard Business Review, Haren and Simchi-Levi note that in the past few years modern logistics technology and a desire to cut costs has seen companies pare back inventory levels — reducing how long they can keep operating without new stock.

Based on inventory estimates and shipping times since the virus closed borders in late January, they estimate we are just two weeks from a major crunch point for many businesses around the world.

'Struggling to survive'

For Megan Anderson, founder of reusable nappy company Tuti, the coronavirus epidemic means months-long delays in getting stock from China.

Factory closures have left $70,000 worth of her orders in limbo. She is awaiting about 5000 nappies through two shipments — one of which was supposed to arrive at the end of January, and another now expected in July.

Anderson is fast running out of stock, and has only enough available for four nappy designs out of the 40 she usually supplies.

Tuti co-founders Megan Anderson and husband Mark. Photo / Supplied

She says her days are now spent messaging customers to let them know about the issues affecting her manufacturer in China, located about an hour out of Shanghai.

Anderson estimates Tuti has lost about $20,000 worth of sales in the past six weeks.

"We're just trying to survive, to keep it going, but it's not exactly great financially because we haven't got anything to sell," says Anderson, a registered psychologist.

"All the work that we were doing with different designers, and other products [in the works], we've basically just shelved it all ... this year will be a shambles."

Anderson is now bracing for a "huge lag" in orders for four to six months. She says the situation is disappointing as the 18-month- old startup, which she founded while on maternity leave in July 2018, was on track to grow sales by 100 per cent by January.

The business had enjoyed encouraging growth and sales had risen by about 15 per cent month-on-month over the past few months after Tuti was featured in British Vogue.

"We're just trying to get through this difficult period, and I know a lot of other businesses that are suffering [too]."

Tuti was founded after Anderson saw how many nappies went to landfill, while she was working in daycare centres during her university training.

She says the popularity of cloth nappies has grown as more customers become aware of the impact of plastic waste.