Last week, the Commerce Department released gross domestic product data shedding light on the overall economy and the road ahead in 2020. Low unemployment, climbing wages, lower household debt, and a robust stock market are credited with supporting a strong economy. Consumer spending extended growth at 1.8% in the fourth quarter. As for the trade war between the U.S. and China, ‘phase one’ of the trade deal is done and an easing of the tariff policy by both countries is showing promise.
Strong consumer spending is the primary reason the U.S. GDP growth rate has been at a steady 2% to 3%. In fact, American consumer spending accounts for over 70% of the GDP, according to the U.S. Bureau of Economic Analysis. Consumer spending is one of the key statistics economists measure when trying to predict the next recession and, at the start of the year, the U.S./China trade deal was aimed at further strengthening economic prosperity.
At the peak of the 2020 Lunar New Year season, China was hit by the coronavirus directly impacting the general health and mobility of the nation. Recognizing that Chinese consumers spend more than $145 billion in their own country is difficult news for the world’s second largest economy that has in many sectors, simply stopped. Mindful of the human safety factor, China’s globally interlocked economy is quickly being tested especially in the areas of its contribution to global supply chains and its massive domestic consumer base.
Companies such as JPMorgan, Ford, Kraft, and Google have introduced travel bans and are evacuating their foreign workforce. Chinese citizens and visitors are confined to their homes or hotel rooms and have been instructed to check their temperatures every hour. Many Chinese citizens who traveled home to celebrate the holiday are now stuck and unable to return to their jobs and day-to-day routines.
The coronavirus outbreak has reminded everyone how interdependent national markets really are. Companies like Apple, for example, have been directly influenced by the shutdown of entire factory lines. Airlines throughout the world are not flying to China and most countries are upholding visa restrictions to further restrain travel and trade, to and from China. According to The World Tourism Organization, Chinese tourists spend $258 billion a year. With China’s economy closed and travel bans in place, businesses that rely on Chinese consumers are quick to learn the importance of diversifying their entire business models. For companies with a strategic thinking culture, finding new markets will be easier than those who have failed to plan.
There are many lessons from this urgent health scare. The first is to remember the human factor and approach the crisis with empathy – thousands of people are sick and China is working very hard under enormous restraints to fix it. The second lesson is to see the world as it is – complex, dynamic and yes, integrated. The globalization of markets is fifty years in the making and has produced enormous prosperity, opportunity and innovation to billions of people. Globalization, or world-wide economic integration, also has its risks which we are witnessing today. The risk of a major economic power slowing or being closed for business is not good but can be managed. The third lesson is for firms throughout the world to aggressively reinvest in their strategic planning. The purpose of strategy is to plan with contingencies and to ensure that the alignment of resources from production to consumption are protected no matter what.