Back in 2015, we published a blog entitled ‘Can Chichester catch a Chinese cold?’. The question at that point related to the early signs of a slowdown in the Chinese economy and the potential ripples that would send out to global markets and closer to home.
When drafting the original post, the idea of a genuine Chinese health emergency, spreading like a cold, was not something we had contemplated. But whilst the cause of the issue is different, the impact and some of the assumptions we made about how it could manifest itself locally are very real. In 2015, we identified that tourism and luxury goods could be two of the biggest issues here in Chichester District, if there was a problem emanating from China. We are yet to hear of any specific impact on tourism locally, largely because Coronavirus seems to have hit during the off-peak season, but with global travel being restricted and corporate travel and associated spend reducing dramatically, it probably won’t be long until we hear of the micro impact in Chichester.
Our other prediction of an impact on luxury goods, and the luxury car market, however, is already being proven correct. Earlier this month, Jaguar Land Rover (JLR) Chief Executive Ralf Speth, said sales in China had “completely stopped”. He added: “It’s zero. You don’t know whether the economy will catch up or whether this kind of loss is just a loss.”
Other luxury brands are reporting a similar cliff edge reduction in sales as increasingly wealthy Chinese consumers stay at home and cut all but necessary spending. Images from news channels and the world’s press show the streets of major Chinese cities empty in the middle of the day. For at least a decade, China has represented the only growth market for most global brands, with many other countries and continents economies flatlining. So, any slowdown in China will have an immediate and direct impact on the fortunes of those connected to the luxury goods sector.
Aside from the reduction in consumer spending, supply chains that involve China are also stalling. JLR is reported to have been flying key fobs and other critical parts out of China in suitcases in order to continue production. But with the motor trade reliant on just-in-time supply chain and no obvious end to the restrictions required to contain the spread of Covid-19, we may begin to see large scale production shutdowns within days or weeks.
When we considered an economic slow down in China, we suggested it as a gradual reduction, or even just a plateau in the rate of growth. This is something one assumes the worlds economists plan for and model on a regular basis. But the rate of change and the potential long-term impact of Coronavirus makes it more of a black swan – one of those unpredictable events that have far reaching consequences.
Despite multiple black swan events in recent decades (9/11 and the 2008 financial crisis) the global economy still struggles to cope with them. Nassim Nicholas Taleb points out in his book (‘The Black Swan: The Impact of the Highly Improbable’) that with each air accident, air travel becomes a little bit safer as the industry sits up, takes note, learns and adapts. But this does not seem to be the case with economic black swans which seem to take everyone by surprise, with markets lacking resilience. Perhaps it is simply an inherent issue of a smaller world and more interconnected markets, but if a little old firm of accountants in West Sussex could see the risk a Chinese ‘cold’ poses, it begs the question why governments, markets and major international companies could not.