January PMI neutral, but coronavirus outbreak could deal blow to the economy
February 5, 2020 Category Macro-economy, Weekly
Factory activity in China’s manufacturing sector remained stable in January as the purchasing managers’ index (PMI) for the manufacturing sector came in at the neutral expansion/contraction threshold of 50. The January PMI reading was slightly down from 50.2 in December, according to the National Bureau of Statistics (NBS). The decline partly resulted from a slowdown in production growth due to the Chinese Lunar New Year holiday that reduced industrial activities. Also because of the holiday break, up to 17.6% of the surveyed enterprises have complained about insufficient labor supply, 2.1 percentage points higher than a month ago.
The survey on China’s manufacturing and non-manufacturing business activities was conducted before Jan 20. On that day, an expert team of China’s National Health Commission (NHC) confirmed human-to-human transmission of the coronavirus and infection of medical staff. “As the impact of the novel coronavirus outbreak on China’s manufacturing was not fully manifested during the period of the survey, we still need to further observe the trend afterward,” said Zhao Qinghe, Senior Statistician with the NBS. One of the main features of the latest manufacturing PMI is that the new orders index increased for the third straight month in January, up by 0.2 percentage point from December, to 51.4. It shows the acceleration of growth of demand in the manufacturing sector and the slowing of production growth, Zhao said, as reported by the China Daily. The non-manufacturing business activity index increased by 0.6 percentage point from the previous month to 54.1 in January.
Spring Festival is traditionally a peak holiday travel time, during which Chinese make inbound and outbound trips and embark on shopping sprees, providing a robust stimulus to the nation’s economic output at the beginning of the year. This year, as Chinese authorities imposed travel restrictions and millions of Chinese canceled travel plans in an effort to combat the epidemic, the contribution of consumption to the Chinese economy is likely to wane significantly, industry insiders said.
Chinese authorities are using monetary tools and strengthening government spending to slow the weakening of economic activity due to the novel coronavirus outbreak. Ample liquidity is aimed to prevent a sharp sell-off as financial markets reopened on February 3. As of January 29, central and local governments had allocated CNY27.3 billion of subsidies for epidemic prevention and control, the Ministry of Finance reported. Tax and financial policies will support companies offering medical supplies. Some large banks, including China CITIC Bank, have said they will lower the lending rate for companies affected by the novel coronavirus.
Economists have difficulties to predict the full impact on China’s and the global economy. Some conservative estimates say the coronavirus outbreak may drive down China’s economic growth by more than 0.5%. “The coronavirus could deal a more severe blow to China’s economy in the near term relative to SARS in 2003,” said Lu Ting, Chief Economist in China with Nomura Securities. Due to the SARS outbreak, real GDP growth plunged by 2 percentage points from the first quarter to the second in 2003. But the coronavirus may prove to be only a temporary shock and may not necessarily leave a long-lasting impact, according to Lu. “We expect a V-shape recovery due to some strong pent-up demand as well as pent-up production following the potential containment of the coronavirus.”
Especially small companies may be vulnerable to the effects of the virus outbreak. “I’m anxious and worried. This is a battle for survival, but I’m losing territory,” a manager of a small robotics company in Shenzhen, Guangdong province surnamed Yang told the Global Times. Yang’s factory employs about 500 people, but has suspended operations due to concerns over the spread of the coronavirus. Yang does not have a date when his factory will resume operations and said it depends on when the epidemic will be under control. “Our spending, mostly in factory rental cost and employee salaries, is amplifying day by day. But we don’t have an income source. If production does not resume before mid-February, the direct and indirect economic loss could be millions of yuan,” Yang said. Across Guangdong, known as China’s manufacturing base and trading hub, a mixed mood of sobriety and anxiety is spreading among entrepreneurs. Some pointed out that if the disruption is extended, many small- and medium-sized manufacturers would be mired in a capital crunch and could even face bankruptcy, the Global Times reports.
Goldman Sachs has forecast that the virus could knock Chinese growth down to 5.5% for the year, from 6.1% in 2019, with knock-on effects for the rest of the world economy.
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