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The global economy after the coronavirus outbreak

3/10/2020

Macroeconomic surveys conducted since the outbreak of the epidemic have provided relief thus far, but over the next several weeks we should expect the negative impact to become more visible in activity and spending data. Yet, the shock is of a temporary nature and a rebound of activity will follow once the supply chain disruption is abating and demand picks up again. In China, stimulus measures which have already been announced, should help in this respect. The unleashing of pent-up demand and inventory rebuilding should also play a role. The dynamics are rather clear but the timing of course depends on how the epidemic evolves, in China and other countries.

TRANSCRIPT // The global economy after the coronavirus outbreak : March 2020

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François Doux:

Turning first to the global economy, specifically global growth

William de Vijlder, hello.

William De Vijlder:

Hello François.

François Doux:

A few weeks ago at the beginning of the year, we were talking about a gradual improvement in the global economy. And then there was the coronavirus outbreak in China. Has the virus already had a macroeconomic impact?

William De Vijlder:

Well, so far we have mainly seen figures concerning individual companies or what we call “high-frequency” data for China: daily traffic levels which tumbled and have not picked up since the Chinese New Year. Coal consumption and traffic through airports have both also collapsed, obviously.

All these indicators have clearly confirmed the image of an economy at a standstill, to put it in rather black and white terms. And of course, economists have been waiting impatiently for macroeconomic data.

François Doux:

Apple, like other electronics companies, has reported supply delays, which highlights China’s presence in production chains.

William De Vijlder:

Absolutely. This phenomenon comes into play. Some automobile manufacturers have said that they could be forced to shut down production due to a lack of supply from China.

Companies are on alert for the possible impact of the epidemic on their revenue and margins. Some have gone as far as to say they will no longer give guidance on future earnings, as the range is so broad that it serves no purpose.

François Doux:

As an economist looking for advanced signals, you look at the Purchasing Managers Indices, which you will tell us about. These much discussed PMI indices already offer us some answers.

William De Vijlder:

By their very nature these indicators are important, and are closely followed by economists as they are the first to be published. In concrete terms, on 21 February, data was published that was gathered in the first half of the month. This shows just how up-to-date and responsive the figures are. The yellow line on the screen shows the composite PMI, that is to say the combined index for the manufacturing and services sector, for the eurozone. We can see that the rising trend, since last October or so, has continued. This is fairly counter-intuitive, and it is a source of comfort.

We can also see here that the business climate in Germany – the red line – has improved slightly. Germany is a particularly important indicator, given that the country is extremely exposed to trade with China.

François Doux:

We will talk a little more about the eurozone later, William De Vijlder. Is the coronavirus shock only temporary?

William De Vijlder:

From a purely “medical” point of view, yes, it is temporary. For an economist, the question is this: when will we see truly convincing signs that the worst is behind us? This is an extremely important question because, even with a temporary shock, are we talking about one quarter, two quarters, three quarters? The chart here shows some of an economist’s thinking. It shows activity levels in a completely stylised way. Here we can draw the link with China, where we expect a very sharp drop in activity in the first quarter. And then a recovery. So here, I have put the bulk of the shock in Q1; the beginning of Q2 will still be difficult, for April, and then things will improve. I will allow you to decide whether this qualifies as a V or a U shape. To state the obvious, what matters is the horizontal element, we do not yet know if it will last one month or two. What we can say, however, is that the economic data that will come out in March (activity levels, spending) and will include data from surveys taken in February, will be bad. And they will still be bad in April. At best, I would say, towards the end of April, purchasing directors will, let’s hope, indicate that the worst is behind us.

François Doux:

And for the whole of 2020? I know it’s a tough question.

William De Vijlder:

Yes, because this stylised V or U also obviously raises the question of a rebound. Why is the rebound so strong? I believe that we can expect a clear trend towards rebuilding inventories. There is also the phenomenon of unsatisfied demand. For instance in China at present, we have seen a collapse in car sales. Naturally, people do not want to buy a new car. Those who were planning to buy a car in the first quarter will order it in the second. Those who were planning to buy one in the second quarter will do the same. This could then produce a rebound in order books.

François Doux:

Returning to the eurozone. Have you changed your growth forecasts, or not yet?

William De Vijlder:

Yes, we have adjusted them. Clearly, everything begins in China. For the year as a whole, we have downgraded our estimate of growth in China by 1.2%. This now gives us an estimate for the full year of 4.5%. In the eurozone, we have an estimate of 0.7%, which represents a slight reduction. As you said at the beginning, the economy looked in better shape at the beginning of the year. So this is the underlying trend that should return once the temporary shock is over.

François Doux:

And there is one topic that is dear to your heart. Uncertainty, the fog that sometimes obscures our view. Looking at the newspapers, the peak of the epidemic could be behind us, although this is all in the conditional. So have we got more visibility for tomorrow?

William De Vijlder:

The word “fog” is interesting in that, to an extent, when we look at the market reaction we have the impression of confidence, that after the fog we will see clearly again. We are more or less untroubled.

So we need to be ready for surprises that would largely be negative in the coming weeks. Why? Because it is very difficult to understand how all this might affect the sales figures for a company, or indeed macroeconomic data. What matters, however, is the number of new cases. Is the number going down? Figures for new cases in the epidemic will be really crucial. They will allow us to look beyond the disappointing economic statistics that we would expect to see.

François Doux:

So there are lots of figures and statistics to keep an eye on. One last question William De Vijlder: will the coronavirus have permanent consequences for the structure of the global economy?

William De Vijlder:

There is a strong chance that it will lead to some adjustments to production chains. There were already some factors pushing in this direction, such as issues of cybersecurity. But this situation will push companies to consider whether their production chains are highly dependent on what happens in a given country, and whether they are exposed to disruption of production in a very limited number of countries, which is a situation that should be avoided. I think that clearly this will trigger some changes in value chains, notably making them shorter, and another little bit of deglobalisation.

François Doux:

In any event, it looks as though we will have plenty of interesting topics to discuss over the coming months. Thank you William De Vijlder for this update on the impact of coronavirus on the world economy. Next we’ll look at the Chart of the Month, which focuses on the countries of Central Europe, where growth, for the time being, is holding up pretty well.

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