11 March 2020
Business surveys have entered deeply pessimistic territory even before the full impact of a global outbreak is factored in. Three of five FLI sectors are mired in the bottom-left quadrant for slowing and below-trend growth, while the FLI quantitative ‘bet’ remains somewhat negative on risk. Weak global PMI readings are unwinding nascent optimism that was supported by an increase in order-to-inventory ratios.
Pockets of brightness
Despite the overall gloom, optimism is growing in the consumer and labour segments, both of which have broken into the top-right quadrant, signalling accelerating and above-trend growth. Consumer confidence has been holding up well, even in a tough quarter for financial markets. In addition, the latest U.S. job report shows a reacceleration of aggregate hours worked.
The speed of China’s return to work will be key to assessing the scope of economic damage from the outbreak. Chinese factories appear to be resuming some production which while a positive is far from full service. April could see industrial supply normalise in the absence of large outbreaks among migrant workers returning to work.
European industrial surveys continued to improve after an awful run in 2019, with an upturn in Germany’s foreign orders, but it’s hard to see the trend lasting. American indicators remain weak and will be particularly impacted by an impending energy downturn.
Gauging the severity of a global virus spread will be more difficult. A bullish scenario sees a few highly significant but ultimately controlled outbreaks in several cities, while the most bearish case means near-unmanageable outbreaks in many major cities, straining healthcare systems in countries including the U.S.
A key question is whether a large number of households and businesses will fall behind on financial obligations, turning a temporary shock from the virus into a permanent one. If not, much of demand may be delayed, not destroyed.
Should the hysteresis impact be limited, the size of a rebound will be partly determined by Chinese stimulus. Based on January credit data, and President Xi Jinping’s still-ambitious growth agenda, this could be a significant support.
Plunging risk-free rates, already creating a large positive impulse from last year, could be felt very strongly in activity readings should the virus be contained.
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