Following the previous report, the new report by Allianz Research highlights and explains the impact of the coronavirus outbreak on the rest of the world. It suggests that trade recessions and manufacturing decline will likely continue. Also the lockdowns happening in China to contain the viral outbreak may cost USD 26 billion in terms of trade shock. In addition to this, the world economy is barely eking out growth in Q1 of 2020 at 2 per cent.
Manufacturing sector trapped in recession in H1
Due to the coronavirus, manufacturing sector, especially at risk computers and electronics will likely contract, the report notes. The business disruption caused by the outbreak in China has pushed several sectors into risk, disrupting the supply chain and lowering global demand. Above term average stocks could rise further in sectors like commodities, textiles, transport equipment and machinery.
At the same time, shortages of goods in sectors with below long-term average stocks such as computers and electronics may pose a risk.
Last year, unusually high levels of stocks caused manufacturing production to plunge into recession, particularly in the advanced economies.
Over the previous few months, the partial stock absorption, the higher uncertainty and lower world demand will most likely tip inventories up in future months. Therefore, the reports suggests that the global manufacturing sector will remain in mild recession in H1 this year.
Potential losses of exports of goods and services to China
Potential losses as much as USD26 bn per week in exports of goods and services to China could occur due to disrupted trade and production. In light of this, the report dialled down their global trade growth forecast for this year by -0.5pp to +1.3 per cent.
Economies most exposed are Germany, Hong Kong, South Korea, the US and Japan. This week’s loss due to the rise in the world import tariff on goods was +1 pp, which is higher than the loss caused by the US-China trade friction in 2019 at 0.7 pp, the report highlights.
From the viewpoint of goods, Germany, Hong Kong, South Korea, the US and Japan are the most exposed economies, with a cost of USD 18 bn per week.
From the viewpoint of services, travel expenses from China, the US and Europe as a proportion of world’s total are 20 per cent, 11 per cent and 30 per cent respectively. The potential losses for the world in this case is about USD 6bn with South Korea, Hong Kong, Japan and the US bearing the most impact, the report notes.
Furthermore, losses related to transportation services (imports from China) could amount to USD 2 bn per week. This severe trade shock should persist until at least 9 February.
Overall macroeconomic impart is yet uncertain
If the business disruption in China does not persist for more than a month and normalises after three months, the macroeconomic impact should remain limited at -0.3pp on global GDP growth in Q1 2020 to +2 per cent, the report notes.
Although the authors opine that the negative spillovers due to the viral outbreak will not persist beyond three months, they do not think that the global economy can recover as quickly after taking that hit, as much uncertainties still remain in H2 emanating from the US which may limit growth expansion.
On the whole, the report argues that the recession in global trade in goods and the manufacturing sector will persist into H1. Due to this, the authors revised the 2020 global GDP growth forecast for countries like Australia, Hong Kong, Thailand, Singapore, Taiwan, South Korea, and Japan, the Eurozone (-0.1pp to +0.9 per cent), all of which are based on the revised forecast for China (0.1pp to +2.3 per cent).
The report suggests that monetary policies will remain active, with the Fed and the ECB possibly resorting to slashing interest rate in H1 this year amidst the isolation of China due to its country quarantine from the virus. This will possibly yield substantial negative impacts on both trade in goods and services, the report concludes.
