China Set to Release Biggest Insight Into Virus-Hit Economy

Terms of Trade is a daily newsletter that untangles a world threatened by trade wars. Sign up here. 

On Saturday, China will give the biggest and most-anticipated insight yet into how much the coronavirus is hurting its economy, with a key gauge of manufacturing activity set to plunge.

As investors brace for a pronounced slowdown in China to ricochet around the world, the official manufacturing Purchasing Managers’ Index due to be released at 9 a.m. Beijing time on Saturday is projected to fall to 45 in February from 50 in January, according to a Bloomberg survey of economists. That would be the lowest since the depths of the 2008 financial crisis.

In a sign of how much confusion the virus is wreaking and how much the data’s release could rock markets, the range of predictions varies wildly. The lowest is BNP Paribas SA’s 33, which would mark an historic slump.Bloomberg Economics forecasts it will fall to40.7.

Investors are clamoring for clues into how much the virus has hit the world’s number two economy after it forced the closure of factories, cinemas, restaurants and stores across the nation. Analysts are split on whether the economy will suffer a short-term slide that’s swiftly reversed as the virus is brought under control or a longer-lasting slump.

Economists at Goldman Sachs Group Inc. are among those to have scaled backestimates for China’s expansion this quarter. They expect the economy to grow 2.5% this quarter and 5.5% for the year. The median forecast for the first three months is for a 4.3% expansion.

China Growth Forecasts Keep Sliding With Goldman Now Seeing 2.5%

How China fares will also have implications for demand elsewhere, given the virus has now cost lives in Europe and the Americas and is undermining international supply chains, tourism and trade.

China accounts for about 17% of global gross domestic product and is the biggest market for new cars and semiconductors, the largest spender on international tourism, the leading exporter of clothing and textiles, and the manufacturer of many PCs and virtually all iPhones.

The International Monetary Fund said last week that it currently expects to knock 0.1 percentage point from its global growth forecast of 3.3% for this year, but that it’s also looking at more “dire” scenarios. Bank of America Corp. economists said this week they now anticipate growth of 2.8% worldwide this year, the worst performance since 2009.

Also released on Saturday is the non-manufacturing PMI, which includes services and construction and is predicted to drop to 51 from 54.1, according to the Bloomberg survey. On Monday, the private Caixin PMI is set to be released. With a smaller sample size than the official gauge and more geared toward non-state companies, economists expect it will drop to 46.3 in February, from 51.1 in January, according to a Bloomberg survey.

What Bloomberg’s Economists Say

“China’s February PMIs — due on Saturday and Monday — take on extra significance as they will be the first comprehensive data to capture the impact of the coronavirus on the economy. There’s no doubt they will show the economy taking a hard hit. Our view is that the beating will be more severe than the latest consensus forecasts suggest, particularly in the service sector.”

— Chang Shu (Economist) and David Qu (Economist)

Most Chinese factories remained shut at the beginning of this month, as authorities ordered an extension of the week-long Lunar New Year break. Bloomberg Economicsreckons Chinese factories were operating at 60% to 70% of capacity this week. Hubei province remains under lockdown.

Other high-frequency indicators also indicate industry has been hammered. Demand for coal to generate electricity hasn’t returned to the level before the holiday and emissions of pollution from industrial activity are lower than they would normally be.

The Data Show China Is Still Struggling to Get Back to Work (1)

“We expect year-on-year growth in all activity data to be negative in January-February,” wrote Lu Ting, chief China economist at Nomura International HK. “Business resumptions have been disappointingly slow.”

Chinese authorities have been trying to spur the nation back to work and pledged measures to support the economy. An official from the state economic plannersaid this week that more than 90% of large-scale industrial companies in the manufacturing powerhouse Zhejiang province have restarted businesses, and over 70% in coastal provinces of Shandong, Jiangsu and Guangdong are also back in business.

“The high work resumption rate reported by the authorities does not represent capacity utilization which we estimate to be about 20% of normal levels as of end February,” said Australia & New Zealand Banking Group economists in an email to clients.

Measures to contain the spread of the virus, including travel restrictions and road blockages, have made it hard for workers to travel back for work and left factories owners with limited raw materials to restart production. The situation has been exacerbated by shortages of protective gear such as masks and sanitizers.

— With assistance by Lin Zhu

Source: Read Full Article