Global Macro: Temporary hit to growth but net effect negative for 2020 – We have downgraded our global growth forecasts due to the impact of the coronavirus. The first quarter will be dramatically weak, but Q2-Q3 will be stronger. The net effect will be modestly negative. The changes are outlined in the table below.
We assume for China that (a) the 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 (b) some output – especially discretionary spending – will be lost forever but (c) most output ‘lost’ in Q1 will be made up later as activity slowly gets back to normal and (d) that front-loading of macro stimulus measures will also support a recovery in growth. In terms of quarterly economic growth, we expect the economy to stagnate in Q1, down from 1.5% qoq in Q4. We are then factoring in a rebound to 2.5% qoq in Q2, before the economy settles back down to the previous trend. We have revised down annual growth for 2020 to 5.5% from 5.8% previously.
The impact on other economies outside China will work through (a) lower demand for their exports (b) disruption to supply chains and (c) less tourism. The pattern in economic growth is similar in our projections to the one described above for China, though in most the cases the impact is more modest. For overall Emerging Asia, we have revised down our forecast to 5.1% from 5.3%.
Given the eurozone’s greater exposure to China and global trade, the downgrades are somewhat more than for the US. We have also updated some forecasts based on realisations and other idiosyncratic factors for each economy. For instance, very weak retail sales and industrial production data in December in the eurozone create a negative base for Q1, which together with the negative impact from the economic shock in China, should see the economy contracting slightly this quarter. Meanwhile, for the US we take into account that US economic data have recently been generally firmer than expected. On the other hand, the production stoppage at Boeing-MAX will weigh on economic growth this quarter. Overall, we expect US GDP to stagnate in Q1.
Our forecasts for economic growth are generally below consensus. This mostly reflects elements other than the coronavirus (see here). We see the balance of risks to the economic outlook as being tilted to the downside despite the latest revisions. The coronavirus could spread and take longer to control meaning that the effects will be bigger and longer lasting than we have factored in. Up until Tuesday, the number of cases had been on a declining trend, with the daily new cases falling to 2000 from a peak of 4000 earlier in the month (see chart below).
However, around 15,000 new cases were added yesterday, due to a change in the methodology in the way cases are registered in Hubei province and this means that the trend is no longer clear. In addition, this creates uncertainty about the numbers more generally in China. If the virus takes longer to control, the weakness in global economic growth in Q1 could spread to Q2 and although there would still be a rebound beyond that, the net effects would be larger.
The economic shock due to the coronavirus increases our conviction that the global monetary easing cycle is not over. Although the shock is likely temporary, it will have a significant near term dampening effect on a global economy that was in a weak position to start with. Underlying inflationary pressures are subdued, and generally risk undershooting central bank targets. We expect further easing from the Fed, ECB and PBoC. We think the environment for rates markets will be supportive, with government bond yields remaining low. We see room for eurozone government bond yields to fall further, as another ECB package starts to be priced in. (Nick Kounis, Arjen van Dijkhuizen, Bill Diviney and Aline Schuiling)