Factories Brace for Virus Blow Just as Demand Starts to Pick Up

(Bloomberg) --

The slow improvement in global manufacturing could be about to take a pause -- or worse -- as firms brace for supply-chain disruptions and a blow to demand from the spread of the coronavirus.

Factories across China are shut as authorities try to control the spread of the disease, while the nation’s trade partners have cut back imports from the world’s second-biggest economy in response to the scare. China is the world’s largest exporter of intermediate goods used by other companies in their products, meaning disruption there has ripple effects across the globe.

“This isn’t necessarily a temporary slowdown,” said Timme Spakman, a trade economist at ING in Amsterdam. “The coronavirus could potentially impact the annual level of world trade in 2020, as it’s not certain that factories and logistics will be able to catch up and fully compensate for earlier delays, given the limited capacity.”

That’s putting a dent in hopes for a better 2020 after global trade fell in 2019 for the first time in a decade. The signing of a trade deal between the U.S. and China had lifted sentiment, though that has proved short-lived.

Amid a selloff in stocks on Monday, the People’s Bank of China stepped in with short-term funding to banks and cut the interest rate it charges for the money. China is reviewing whether it should soften its 2020 economic growth target, according to people familiar with the matter.

What Bloomberg’s Economists Say...

“The longer the coronavirus curtails China’s factory output, the bigger the risk of disruption elsewhere... Uncertainty about the severity and duration of the virus outbreak, and hence its impact on China’s factory sector, remains elevated.”

--Maeva Cousin. Read the full INSIGHT

IHS Markit’s latest factory Purchasing Managers’ Indexes from around the world showed the situation was fragile even before the latest threat. While European activity is picking up, manufacturing still shrank in January in Germany, Italy, Spain and the Netherlands.

According to Chris Williamson at IHS Markit, the coronavirus is among the “key risks which could alter the brightening outlook.” Others include the threat of U.S. tariffs, trade-war escalation and Brexit.

European companies operating in Wuhan -- the suspected epicenter of the outbreak -- and across China have already started to flag hits to profit from extended plant closures. Wuhan is the fourth-largest city for auto production in the country, and both Peugeot and Renault have operations there.

In Asia, the PMI measure for South Korea -- often viewed as a key barometer of global demand -- fell to 49.8 from 50.1 in December, below the key 50 level separating expansion from contraction. The PMI for China showed growth, though the pace softened slightly.

Separate figures showed industrial profits in China fell more than 6% year-on-year in December. Citigroup said the “macro backdrop is turning more unfriendly,” and it cut its prediction for Chinese economic growth this year to 5.5% from 5.8%.

Many are using the 2003 outbreak of SARS as a reference point for estimating the coronavirus impact, though China’s economy is vastly bigger now.

James McCormick at Natwest estimates that the global manufacturing PMI could drop to levels not seen since 2009, when the world was just starting to recover from the financial crisis. Still, he notes that the SARS effect on growth and markets was “short-lived and once it had passed, the global economy resumed its solid uptrend.”

“I wouldn’t quite call today’s uptrend in global manufacturing solid, but we were certainly seeing some stabilization before the virus,” McCormick said.

--With assistance from Mark Evans and Enda Curran.

To contact the reporters on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net;Fergal O'Brien in Zurich at fobrien@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Jana Randow

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