Investors May Be Overlooking a Second Blow to China’s Economy
The coronavirus spread in the U.S. and Europe could knock a half percentage point off of China’s GDP, according to Vanguard.
(Bloomberg) -- A second hit could be coming for China’s economy after its initial shock from the coronavirus, said Joe Davis, chief economist at fund giant Vanguard Group.
While China has seen new cases of the virus slow, its spread is intensifying in the U.S. and Europe. Should that trend keep hammering the economies of both regions, it could knock a half percentage point off of China’s gross domestic product for the year as demand for Chinese goods slows, he estimated.
“One risk that’s not priced in is that, should we see cases expand, there will be a second demand shock in China,” Davis said in a phone interview Friday.
That kind of downward spiral would be yet another reminder of how closely entwined the global economy has become. In December, before the virus outbreak seized global markets, Vanguard had estimated that China’s economy would slow to a below-trend pace of 5.8% growth this year.
U.S. stocks plunged more than 11% last week to their largest weekly loss since the 2008 financial crisis. The Federal Reserve cut interest rates on Tuesday in a surprise move to help stimulate the economy. The 10-year Treasury yield was cut in half in the past two weeks, reaching an all-time low of 0.66% at one point on Friday.
Vanguard is keeping its U.S. growth outlook slightly below 1% for the year, about in line with its original estimates, Davis said. That’s because of the added buffer of strength the economy showed in the first two months of the year. Payrolls rose 273,000 in February, beating estimates, as employment was on strong footing prior to the broader global outbreak.
The U.S. is likely to avoid a recession if the number of coronavirus cases slows by mid-April, Davis said. Vanguard currently estimates the odds of recession at about 40%.
“The next several weeks will determine this path,” he said.
To contact the reporter on this story: Annie Massa in New York at amassa12@bloomberg.net
To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Josh Friedman
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