WATCH: China rapid rebound thesis tested as virus disruption deepens

By Enda Curran Time of article published Feb 12, 2020

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INTERNATIONAL - Economists are turning more pessimistic over the chances of a speedy recovery for China’s virus-hit economy, as evidence mounts that the disruption will be deeper and more long-lasting than first thought.

With factories struggling to re-open amid curbs on movement, consumers housebound and global supply chains fraying, analysts from Citigroup Inc., Nomura Holdings Inc., Gavekal Research are among those signaling deeper concern than their initial estimates. That’s even amid signs that the spread of the disease is slowing.

S&P Global Ratings said growth this year could be as low as 5%, which would be the weakest since the early 1990s, while Capital Economics Ltd. goes as far as to predict the end of the world economy’s 43-quarter growth streak.

Such concerns challenge the early prediction that China’s economy would follow a v-shaped trajectory, slowing sharply in the opening months of 2020 and then rebounding as fast. Global policy makers are on the alert for a longer slump with Federal Reserve Chairman Jerome Powell on Tuesday singling out the virus among the risks to U.S. growth.

“I don’t think we can say that it is just a quarterly shock that then everything goes back to normal,” Alexandra Heath, head of economic analysis at the Reserve Bank of Australia, said on Wednesday.

Sentiment in global financial markets has been improving on speculation the economic impact of the virus will ultimately prove temporary. Chinese shares rose Wednesday after those in the U.S. hit a new record.

The economist worries though point to the rising awareness that the economic implications of the virus outbreak will be wider and deeper than those following the 2003 spread of SARS. Many analysts had used that experience as a first template for how the Chinese and world economies would fare this time, hoping that once again the threat would pass and expansions would resume.

Doubts are mounting. Restoring production is being complicated by orders to wear face-masks and curbs on travel. Economists note real-time data such as property sales, coal consumption, airport arrivals, box office sales, traffic flows and the return of migrant workers from the recent Lunar New Year holiday all point to lackluster economic activity that may take longer to recover.

Nomura’s economists warned this week that even if the worst of the virus passes, business could be slow to return to normality, resulting in rising numbers of bankruptcies, mass layoffs and worsening demand.

President Xi Jinping, for one, is sticking to the recovery script that says the virus will be defeated swiftly, allowing factories and shoppers to normalize activity and make up for lost ground. Xi pledged this week that China would still meet its economic goals and be “more prosperous after overcoming this epidemic.”

And he’s not alone. Ray Dalio, the billionaire founder of Bridgewater Associates, said on Tuesday that the impact of the outbreak on markets has been exaggerated and is likely to be short lived.

Government stimulus, while moderate, is expected to cushion some of the blow. The central bank has injected more liquidity and trimmed rates. Fiscal policy should be more supportive, though on either front China is unlikely to roll out aggressive measures.

The SARS experience that many rely on is being tested. Fatality and infection rates have already soared past SARS levels -- in a shorter time frame -- and its geographic spread is wider.

China is also more economically influential than it once was, accounting for 17% of global output, four times the amount of 2003. That means problems there are transmitted abroad either via weaker demand or failure to produce the parts foreign manufacturers need.

It’s the biggest market for new cars and semiconductors and churns out virtually every computer notebook or smartphone. Apple Inc. and General Motors Co. are among the big name brands already feeling a hit. Singapore, Australia and South Korea are the trading partners at particular risk, according to Bloomberg Economics.

“Economically, this process will be disruptive for months to come,” said Victor Shih, associate professor of political economy at the University of California San Diego.

Citigroup’s China economists led by Liu Li-Gang on Tuesday said their Jan. 29 assessment now looks too optimistic as they again downgraded their growth forecast. They now see first quarter GDP of 3.6% and annual growth of 5.3%, compared to 4.8% and 5.5% respectively.

In a report to clients on Tuesday titled ‘Back to Work, Not Back to Normal,’ Beijing based Andrew Batson and Ernan Cui at Gavekal warned upcoming readings on the economy may be even more “horrific” than seemed likely just last week.

All of which means the coming weeks will be crucial for determining how the recovery plays out.

“The longer it lasts, the more U-shaped the recovery might be,“ said Tianlei Huang, research analyst at the Peterson Institute for International Economics.


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