Global Macro: Base case for China still on track, but risk growing for spread elsewhere – Fears that the impact of the coronavirus on the global economy may be worse than assumed dented investor risk appetite today. Equity markets slumped, while government bond and gold prices rallied sharply. We have recently downgraded our global growth forecasts to reflect the impact of the coronavirus. In summary, we factored in a sharp slowdown in China’s GDP growth in Q1, a rebound would follow thereafter, but the net effect would be negative (as some discretionary spending would not be made up later). We assumed modest but significant effects for other economies over the first half of this year due to spill-overs from China due to (a) lower demand for their exports (b) disruption to supply chains and (c) less tourism.
Given recent developments, does our base case still hold? As far as the impact on China goes, our assumptions still look reasonable. We assumed that the Chinese economy will resume operations later in February and get more or less back to ‘normal’ from March onwards as the virus is brought under control. Given that the number of new cases has come down significantly (at least taking the numbers at face value) this still seems a fair call. Of course, there remains uncertainty about the extent of the GDP growth dip, though our assumption on the timing of the down leg and subsequent up leg still seems to hold.
However, the risks related to our assumptions about the impact on other countries look subject to downside risks. There has been a more significant spread of the virus to South Korea and Italy. While, there are also a significant number of cases in Japan and Singapore. This group of countries makes up around 8% of global GDP, obviously not as significant as China’s share alone (just shy of 19%), but still sizeable. Italy makes up just under 2% of global GDP and around 15% of eurozone GDP. If these economies start to see significant direct effects on activity (over above the indirect effects from the shock to China), the shock to the global economy would be noticeable. Over and above this, the risk that more countries see a more significant spread of the virus seems to have risen, which would increase the size and longevity of the economic shock. There is too little information at present to make any further adjustments in economic forecasts, though we continue to judge that the risks to our current projections are clearly tilted to the downside. (Nick Kounis)
Euro Macro: February surveys do not yet capture the coronavirus impact – A number of surveys tracking the eurozone’s business climate in February were published in recent days. They gave mixed signals. To begin with, the eurozone composite PMI increased to 51.6 in February, up from 51.3 in January. This rise was the weighted average result of a jump in the manufacturing PMI to 49.1 from 47.9 and a rise in the services sector PMI to 52.8, up from 52.5 in January. The details of the PMI report show that, paradoxically, the rise in the manufacturing PMI largely resulted from a rise in the suppliers’ delivery times due to supply chain disruptions related to the outbreak of the coronavirus in China. Indeed, the sub-index for the suppliers’ delivery times in manufacturing jumped by almost 5 points in the eurozone and by more than 8 points in Germany. Therefore, more than half of the rise in the eurozone manufacturing PMI actually was a sign of coronavirus-related weakness. On top of that, the forward looking components of the eurozone PMI, such as the manufacturing new export orders and services new business and expectations indicators all edged lower in February. Meanwhile, Germany’s Ifo business climate indicator also rose in February. The most striking part of the detailed data was that the expectations component of the manufacturing indicator rose, whereas the expectations in services, construction and trade all fell. According to the Ifo report, the current conditions in services also declined. All in all, we think that the negative impact of the coronavirus on eurozone manufacturing have not yet fully translated into business climate indicators, although it shows up in some of the details of the reports. Moreover, it seems the gradual slowdown in the services sector has continued. Therefore, we expect business climate indicators to decline in the coming months. (Aline Schuiling)