February Economic Update: Damage containment
A tentative reprieve from geopolitics has quickly given way to market concern about coronavirus, overshadowing the short-lived optimism on the US-China trade truce. With China much more interconnected, the impact could be sizeable. Even though it's early days, but it poses headaches for major manufacturing economies still trying to bounce back
Executive summary
Coronavirus ‘fear factor’ is the biggest risk to the economy
The coronavirus has already hit demand in China, as well as supply chains further afield. But if the outbreak becomes more widespread overseas, the major risk is 'fear', and this could begin to take its toll on consumer spending and trade growth among developed economies
US: Fighting the fear
Market optimism following the US-China trade deal announcement has given way to fear of what the human and economic cost may be from the coronavirus. Policymakers are understandably reluctant to act right now. If consumers and business respond negatively, they probably won’t hesitate. We have trimmed our growth forecast for this year to -1.5% from 1.7%
Eurozone: Zigzagging towards stronger growth
The eurozone ended 2019 on a soft note, with growth decelerating to 0.1% quarter-on-quarter. While the stars are aligned to see a gradual, though subdued, growth acceleration, the coronavirus might delay the improvement a bit longer, leading us to downgrade our 2020 growth forecast to 0.7%.
UK: Rising optimism tempered by Brexit and virus risks
Despite rising optimism among firms, the risk of an abrupt change in trading relationship with the EU in 2021 means that investment is likely to remain under pressure. For the time being though, we expect interest rates to remain on hold at the next few Bank of England meetings
China’s challenge from coronavirus
China is facing more challenges in the middle of the outbreak of the coronavirus, from retail to manufacturing to possible defaults in bank loans and bonds. But the government is going to try to contain the damage to the economy with more fiscal stimulus
Japan: In case of emergency
Japan only has about 25 cases of coronavirus, but if this is just the start of a bigger outbreak, it could see GDP growth slow sharply into a full-blown recession
FX: Re-pricing for a shock
FX markets are in the process of adjusting to the coronavirus news – largely seen as a Chinese demand shock. If the virus was to start weighing heavily on activity outside of China – especially in the US – then the dollar might have to re-price lower as well
Rates: Path of least resistance
Market rates are likely to remain relatively low; at about current levels or lower in the coming weeks (and likely months). Structural reversion to higher rates would need evidence that there has been a positive turn of the tide. In the meantime, an information vacuum perception sustains vulnerability. These are strange times, so expect volatility
Global forecasts
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7 February 2020
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