The Global Economy and Coronavirus: A Reality Check

Recent data on manufacturing sentiment—and signals from commodity and shipping markets—point to continued resilience in Asia, the United States, and Europe.

On the surface, readings of Chinese business sentiment in February 2020 would seem to confirm the worst fears about how economic activity is being affected by the Covid-19 coronavirus outbreak—an important consideration not only in China but elsewhere, given the country’s vital role in the world economy. Both versions of the China manufacturing purchasing managers index (PMI) plunged to all-time lows for the month (see Chart 1).

Chart 1. Coronavirus Weighs on Chinese Manufacturing Sentiment Indexes
Data for the period January 31, 2006–February 29, 2020

Source: Bloomberg. Data as of March 2, 2020.
CFLP (“Official”): The China Manufacturing Purchasing Managers Index (PMI) provides an early indication each month of economic activities in the Chinese manufacturing sector. It is compiled by China Federation of Logistics & Purchasing (CFLP) and China Logistics Information Centre (CLIC), based on data collected by the National Bureau of Statistics (NBS).
Markit (Caixin): The Caixin China General Manufacturing Purchasing Managers' Index (PMI) is an independent snapshot of operating conditions in the manufacturing sector, which is sponsored by media group Caixin Global and compiled by London-based data analytics firm IHS Markit Ltd.

But some perspective is in order. In our view, these sentiment indexes exaggerate the economic slowdown in China by reporting on the direction of activity—better or worse versus the previous month—as opposed to the magnitude of the change. Thus, the fact that the drop was much worse than during the global recession in 2008–09 is more a reflection of the deceleration in the trend growth rate of the Chinese economy over the past 10 years and the wider scope of the impact of the virus across industries, than an indication of a sharper slowdown in output growth than the one that took place in 2008–09, in our opinion.

Reading Other Signals
If the Chinese economy had really gone over a cliff in February, the reaction in commodity markets world have been much more severe, in our view. Copper prices would have fallen much more sharply as opposed to remaining well above both the 2008 and 2016 lows. The same pattern holds for iron ore. In our view, we should also have seen a significant break lower in global shipping container rates if the Chinese manufacturing sector had fallen into an abyss.

Moreover, there was only a mild reaction among China’s key regional trading partners—Korea, Taiwan, Vietnam, and Thailand. Sentiment in these nations, as measured by an aggregate PMI, declined only modestly in February. Meanwhile, a separate survey for February showed an overall improvement in manufacturing sentiment in the eurozone, especially in Germany. And while the key U.S. manufacturing sentiment indicator, the Institute for Supply Management (ISM) index, dropped a bit more than expected in February, both the headline and new orders subcomponents held onto most of the unexpectedly large increases in January.

Reconsidering Recession Risk
Most importantly for investors, we believe the Chinese economy remains capable of responding positively to extensive stimulus measures being applied by policymakers. Moreover, these are likely to be matched, in direction if not magnitude, by stimulus measures in other large economies.

While we believe that risk remains palpable that measures taken to limit the spread of the Covid-19 virus to more countries will continue exerting downward pressure on global GDP—including the potential for renewed outbreaks in China as the economy gradually returns to normal levels of activity—a host of indicators confirm that the global economic slowdown emanating from China has not been strong enough to trigger a full-blown recession, as opposed to what could be extrapolated from the plunge in China’s sentiment indicators. While conditions could change as the global coronavirus outbreak unfolds, we believe these developments offer encouraging news about the resilience of the global economy.