Monthly Macro Outlook: A bad movie remake

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Contrary to what bears have said here and there, we don't think that the coronavirus will be the trigger of a prolonged slowdown or a major market correction. There are many signs that growth is modestly picking up in early 2020 and we believe that the fiscal and monetary push from China and other central banks to offset the macroeconomic impact of the virus will help stimulating the recovery this year.


China: More resilient than in 2003

The question is no longer if, but how hard, the coronavirus will damage the Chine economy and its main trade partners in Q1 2020. The effect on the Chinese economy is expected to be broad-based, hurting retail sales, tourism, transportation, real estate and production. Preliminary data show the large amplitude of the impact. For instance, according to the Transport ministry, past Saturday, overall transportation dropped by 28.8% from the same day last year. Railway transportation fell by 41.5%, roads by 25% and passenger flights by 41.6% for the same day. With the quarantine of approximately 16 cities, 50 million inhabitants and the extension of the New Year holidays, growth in T1 2020 is likely to fall below 6% for the first time since the quarterly GDP figures are released.

However, we consider that the Chinese economy will be able to recover quite fast considering the government has confirmed its willingness to do whatever it takes to stimulate economic activity. In our view, a major difference with the SRAS is that the authorities are now fully able to implement in a very short period of time efficient methods to contain contagion. Q1 GDP is doomed to decelerate significantly, but the economy will likely recover fast in Q2 fueled by high inflow of liquidity from the PBoC, via open market operations, and further fiscal stimulus (both tax cut and public spending) that could be announced by the end of February. Due to the importance of real estate investment and consumption in terms of contribution to GDP, we believe the fiscal stimulus will predominantly target the real estate sector and demand. 

Rest of the world: Virus concerns are growing

In the rest of the world, the early 2020 rebound, which has been fueled by higher credit inflow in China and lower geopolitical risk, could be overshadowed by the final economic cost of the coronavirus. In our view, the negative economic impact should be short-lived and will constitute an opportunity for further fiscal and monetary stimulus. While we firmly believe that the ECB will remain on hold throughout most of the year, we think that the international outlook could push the Fed to open the door to a rate cut in March (for more on this topic, please read our CIO's latest analysis). The Fed has always taken into consideration the global context, but it seems it is playing an ever-dominant role under Powell’s leadership (e.g. trade war). Such a move has not been yet priced in in the market, but there will certainly be a macro case for rate cut in the coming months once we will have more data covering the period after the outbreak of the virus.

In the Eurozone, we expect that the coronavirus will have a deeper impact on Germany than on any other countries. Export growth to China, which was back for the first time in 2019 in positive territory in December at 2% YoY, is doomed to slow down again in Q1 this year. However, the overall picture is still improving and fundamentals of the economy remain solid. Export growth to Turkey and the United Kingdom, two key trade partners, is up on a yearly basis and the service sector, which contributes to 70% of the total GDP, is rebounding. January Flash Service PMI was out at a 5-month high of 51.1 vs prior 50.2. Consumption along with public investment should also keep stimulating the economy this year. Slowly but surely the German economy is getting out of the woods.

The same positive view applies to the eurozone outlook for 2020. We have recently updated our leading indicator for the euro area, credit impulse, which tracks the flow of new credit from the private sector as percentage of GDP. Credit impulse is considered as the second derivative of credit growth. Our indicator is standing at 0.2% of GDP on a quarterly basis. It means that the inflow of new credit, thought at low level, is still flooding into the economy. As was the case in previous quarters, France remains one of the main contributors to positive credit push in the eurozone, with France’s bank loan growth evolving continuously above the stunning level of 5% YoY since July 2018.

Monetary conditions are also slowly improving. Our below model based on 17 variables including REER, interbank rates and monetary aggregates, shows that monetary conditions are becoming more accommodative, but the level of accommodation is still far from the level reached in the period immediately after the launch of the QE. In terms of economic activity, the year 2020 is unlikely to be remembered in the history of the eurozone. Once the external shock related to the coronavirus will be behind us, we expect a steady and uneventful improvement in GDP growth for the rest of the year.

Calendar of February 2020 

Feb 2: End of the Lunar New Year Holiday

Feb 3: Reopening of China’s A-share market and Iowa caucuses

Feb 4: RBA meeting and State of the Union address

Feb 11: New Hampshire caucuses

Feb 12: RBNZ meeting

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