The auto industry at the center of the crisis unleashed in China

A phenomenon that barely existed two months ago has such a potential impact should make us reflect on whether we understand in depth how the economy works.

The spread of the coronavirus tops the international macroeconomic agenda. The Federal Reserve is “closely monitoring the emergence of the coronavirus,” its chairman Jay Powell told the US Congress. Analysts expect the disease to have a significant impact on growth – an estimate cut of the overall annual growth rate 0.5 percentage points this quarter. That is almost half a trillion US dollars in lost economic activity. The cause is the disruption of the Chinese economy that combined with China’s role today in global value chains.


That a phenomenon that barely existed about two months ago has such a potential impact should make us reflect on whether we understand the economy well. There are three observations of the coronavirus crisis to consider – and timid lessons it will leave us.

First, it should be borne in mind that the auto industry is at the center of possible contagion – economic, not epidemiological – because factory closings in China trigger slowdowns elsewhere. Of course, other sectors are also in danger. But the auto industry is important for two reasons: companies warned of the impact almost immediately (automakers in Europe and South Korea have already been forced to stop production due to a lack of Chinese parts), and this sector remains crucial to the largest industrial economies. Its symbolic position is not unfounded: it serves to highlight how globalized production patterns have become and, therefore, how interdependent the economic performance of countries is.

Second, the auto industry is facing the parts supply crisis caused by the virus after suffering a series of blows. Dieselgate, the uncertain future of internal combustion engines and the advancement of electric vehicles, the trade barriers of Brexit and the trade wars waged since the White House, all have contributed to the industrial recession in Europe and the US, and the coronavirus can only make things worse. the question is: how do we distinguish between a point interruption and a downward trend? For 18 months, policy makers have mentioned the need to determine whether industrial weakness is an incident to ignore, or a sign of longer fragility requiring a change in policy.

The sequence of bad news for the automotive sector should perhaps make us reconsider that distinction. What difference does it make after a while if the slowdown or recession consists of one long contraction or many small ones? If the causes are difficult to determine, policymakers may want to focus on more visible factors, such as whether the weakness lasted for a period of time, or whether the initial shock appears to be triggering a dynamic that is feeding back. Such dynamics could include spills to related but initially unaffected sectors, or consumers’ response to supply crises, which is to curb demand.

This last possibility leads to a third point. Economic analysis distinguishes demand crises (which changes what people want to buy) from supply crises (which changes what people are able to sell). In practice, the coronavirus crisis shows that most economic events involve both crises.

While it is clear that the epidemic begins as a blow to supply in China, the negative impact on the income of Chinese workers and the reduced need for imported raw materials and industrial inputs translate into immediate demand shocks. Of course, the same is true in markets where the repercussions are felt. The drop in demand, in turn, tends to make companies slow down investments, so that in the future their supply capacity will be less.


The combination of demand and supply crises is, in a sense, good news. Policymakers have tools to deal with both, but the supply side is more difficult to improve, requires more specific policies, and takes longer to show results than demand side policies.

Therefore, the coronavirus leaves general lessons. We are all interdependent, the economy may take a more sudden turn than anticipated, and macroeconomic policy makers must act quickly.

Contact the author: noeljenkins@wheelsjoint.com


avatar