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  • The Chinese manufacturing and services lowest levels since 2008 and 2011 as coronavirus sickness the economy. 
  • Current data gives first glimpse at the devastation the virus has caused to industries across the country.
  • The economic consequences will probably be substantial but at least transitory.

The coronavirus epidemic’s tail risks are feeding their way through to hard data as of this weekend. The Chinese manufacturing and services shocker is a slap in the face to already downtrodden committed bulls refusing to get out of the way. The implications are stark for the global economy and global bankers may well have little choice but to reluctantly step in to bring some much-needed relief to financial and commodity markets. 

  • Global coronavirus death toll passes 3,000 with new China count

The key question is whether the outbreak’s economic consequences will be transitory, although, that is something we cannot model and it’s the here and now for which markets are responding, with an immediate focus on China. China is going to have to ‘work’ its way back to health, but that’s exactly what the nation is already starting to do. Firstly, let’s take a deep look into the current state of affairs there.

We have been seeing a number of credible estimates already suggest that China’s annual Gross Domestic Product growth could fall by 2-4 percentage points per quarter until the virus peaks. That estimate has been underpinned by the weekend’s China’s official manufacturing purchasing managers’ index (PMI) which dropped to 35.7 in February from 50.0 in January, below the 38.8 figure reported in November 2008. The non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also dropped to 29.6 from 54.1 in January, the lowest since November 2011. 

Immediate market impact

These announcements follow the epidemic and the data was the first glimpse at the devastation the virus has caused to industries across the country. However, this was to be expected and should come at no surprise. Although, the hard data is a reality check and may take a day or so to be digested by jitter and algo driven markets. Historical experience with similar large shocks suggests that the short-run economic damage may be considerable, so it is likely to encourage investors to de-risk their portfolios and a spike in volatility should be expected, especially in sectors deemed to have the largest exposures, such as travel and tourism, luxury goods, and autos.

Looking on the bright side

Going forward, we are expecting to see consumption and output to continue declining, not least because of mobility restrictions, with millions of people on shut-down, both voluntary and enforced. Indeed, the Lunar New Year holiday that usually provides a boost to the economy was lost this year around. However, there are some encouraging developments, and when the virus peaks with declining numbers of new cases, we can start focussing on economic recovery. In fact, the National Development and Reform Commission spokesman Cong Liang said that over 90 per cent of industrial enterprises in Zhejiang province, one of the country’s top manufacturing bases, has, in fact, resumed operation. According to Cong, over 70 per cent of production in the manufacturing and export hubs of Guangdong, Jiangsu, Shandong and Liaoning had also restarted. With hopes that the virus will be contained and that the worst is behind China, in terms of the rate of infections. 

A Black Swan event, but transitory

So, if there is going to be a peak this year, as the authorities contain the virus, the most optimistic forecasts indicate a partial recovery in H2 with a material impact on annual global growth. But one cannot rule out the possibility of a prolonged pandemic – aka, a Black Swan event. In such an event, we could see a far more extensive damage to the global economy, owing to business failures and declining employment, faltering private investment and weak or late policy responses (Tuesday’s Reserve Bank of Austalia meeting will be the first of a series of meetings in March to monitor closely for clues, more on the RBA here). 

But, let’s keep on the optimistic outlook shall we? If SARS was anything to go by, we know that China, is far from being a fragile economy and even less dependent on trade than it was when SARS was borne back in 2003, owing to its growth in the digital and online commerce. As much as 35.3% of all Chinese retail sales now occur online; mobile internet penetration is very high and rising, and China’s mobile-payments systems are the world’s most advanced. Advanced digital infrastructure means that workers in many jobs and industries can continue to work from home, and this too goes for the rest of the world. There are a host of alternatives and ways in which countries can adapt in worst-case scenarios. However, the most pessimistic outlook for China will be the efforts to move key elements of global supply chains away from China, something which the US/China trade tensions had reinforced such a trend.

All in all, for now, the epidemic’s and tail risks, while being significant and very frightening, the continued rapid responses from the Chinese authorities and now global nations tackling their own cases are proving successful and are encouraging. Indeed, the economic consequences will probably be substantial but at least transitory. When markets catch onto that, we will soon be back to an equilibrium, and this will be seen as a healthy correction, albeit in a ten-year trend of a seven-year cycle. 

Let’s stay optimistic

On a final note, let’s stay optimistic.

“If fighting COVID-19 has been a war, then we have won the first round but not the entire war because the situation can be very unpredictable,” Vietnam’s Ministry of Health quoted Deputy Prime Minister Vu Duc Dam as saying and announcing that all 16 infected patients in the country were discharged from hospital and declared cured. World Health Organization (WHO) officials and health experts said the government’s swift response to the emergency was crucial in containing the crisis at the early stage.