Production disruptions caused by the Covid-19 outbreak could cost the global economy twice as much as a hypothetical global military conflict, recent research by the McKinsey Global Institute shows.
In a report headlined ‘Risk, resilience, and rebalancing in global value chains’, the analysts of US-based consulting firm McKinsey evaluated various risks of a manufacturing shutdown lasting 100 days. The economic shocks considered in the report stem from a wide range of possible events – from a cyberattack and trade rows to military conflicts and a pandemic – and vary in frequency, lead time, and nature of impact.
It turns out that damages from a hypothetical world war scenario could amount to around $15 trillion, while the coronavirus pandemic would cost as much as two such conflicts and leave a hole of around $30 trillion in the global economy. This is three times more than the cost of the Great Recession, which is estimated at $10 trillion, and 30 times as much as the fallout from a large-scale cyberattack.
According to the McKinsey analysis, based on a model informed by the financials of 325 companies across 13 industries, value chain disruptions can easily wipe out more than 40 percent of a year’s profits every decade on average. However, a single severe event that disrupts production for 100 days could erase almost a year’s earnings in some industries.
Labor-intensive value chains are most exposed to pandemics, the report says. As for industries, the pandemic has the worst impact for apparel, which accounts for the largest share of employment, providing at least 25 million jobs globally, followed by aerospace, furniture and petroleum products, among others.
“While the COVID pandemic has delivered the biggest and broadest value chain shock in recent memory, it is only the latest in a series of disruptions that has exposed value chains and companies to damages,” the research warns, calling on companies to be ready to mitigate the emerging risks.