“Rolling Natural Disaster” – COVID-19 Supply Chain Shock Could Trigger Global Depression 

Evidence of creaking global supply chains is fast emerging, at risk of triggering the next global depression amid the COVID-19 pandemic. 

A supply chain crisis that began earlier this year, one that we warned from the very start, has now spread across Asia to the Middle East to Europe, and now to the Americas.

"This is kind of a rolling natural disaster," said Ethan Harris, head of global economic research at Bank of America. "In terms of the impact on global production, the shutdown outside of China will likely become bigger than the impact from China."

Harris warned that the shock to global supply chains is deep and broad and could easily last through the next quarter. He estimates that factory shutdowns in many regions could last until May.

He describes a twin shock, one where a supply chain shock has been combined with a demand shock, culminating into a perfect storm, will likely tip many countries into recession, if not depression during the second quarter. 

Bloomberg piecemeals current supply chain disruptions seen across the world: 

Apple has had the most exposure to a China shutdown, with manufacturing plants in the country still operating well below full capacity in late March. Virus-related closings have hammered several of the company’s key suppliers operating in South Korea, Italy, Germany, and Malaysia. 

In late January, Freeport-McMoRan’s CEO Richard Adkerson warned that the virus outbreak in China is a "real black swan event" for the global economy. The company’s mining operations in Peru have recently been halted. Other mining facilities in Chile, Canada, and Mongolia have also been shuttered. 

Across Europe, Airbus and Volkswagen AG have closed production plants amid severe virus outbreaks in Italy, Spain, Germany, France, Switzerland, and the UK. Major transportation networks on the continent have come to a standstill as nonessential travel has been banned in many regions. 

Europe’s car industry has been absolutely devastated by virus disruptions in China and elsewhere. 

Germany’s Schaeffler Group, a major supplier for European carmakers, announced this week that it would reduce hours for thousands of employees and slash production. 

"As we have to reduce production in our plants in the light of the crisis, it was important to us that flexible solutions be quickly established," said Juergen Wechsler, who represents Schaeffler workers for union IG Metall.

Across the Atlantic, we noted as early as the start of March, that China’s supply chain meltdown reached US West Coast ports and was about to unleash economic doom on "the greatest economy ever." Several weeks later, GDP estimates for the second quarter are apocalyptic via JPM’s chief economist Michael Feroli, expecting an unprecedented -14%, a drop the kinds of which have never before been seen.

As the US economy grinds to a halt, General Motors Co., Ford Motor Co., and Fiat Chrysler Automobiles NV are shutting down plants, resulting in steel and aluminum manufacturers to reduce capacity as well. 

"We have ships loading steel in Europe next week headed for the US, but will there be shipments beyond that with industry shutting down?" Anton Posner, CEO of supply-chain management and consulting company Mercury Resources, asked. "Who’s going to hold inventory if there’s no consumption?"

As creaking supply chains are seen across the world, the second quarter will most likely be one of the biggest crashes in economic data the world has ever seen.