Covid-19 pandemic savages global economy; US PMI at record low

Paris

EVIDENCE that the coronavirus pandemic is hammering the global economy mounted on Tuesday as business activity surveys from Australia and Japan to Western Europe showed record falls. The US figure fell to an all time low of 40.5 in March after hitting 49.6 in February.

"The coronavirus outbreak represents a major external shock to the macro outlook, akin to a large-scale natural disaster," analysts at BlackRock Investment Institute said in a note.

Activity in the 19 European Union countries that share the euro currency crumbled in March as nationwide lockdowns to curb the spread of the disease - which have shuttered shops, restaurants and offices - took hold.

IHS Markit's flash composite Purchasing Managers' Index (PMI) for the euro zone, seen as a good gauge of economic health, plummeted to a record low of 31.4 this month from February's 51.6. That was by far the biggest one-month fall since the survey began in mid-1998 and below all forecasts in a Reuters poll which gave a median prediction of 38.8.

In France, services fell to a record low and manufacturing saw its steepest drop since the global financial crisis.

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"Taken together, these declines suggest GDP (gross domestic product) is collapsing at an annual rate approaching double digits," IHS Markit economist Eliot Kerr said.

A PMI for the services sector in Germany, Europe's largest economy, also showed a record contraction in activity.

A sister survey showed post-Brexit Britain's economy shrinking at a record pace, faster than during the 2008-09 financial crisis.

IHS Markit said the March figures suggested the euro zone economy could shrink by around 2 per cent quarter-on-quarter in the first three months of 2020, and the escalation of measures to contain the virus could steepen the downturn in Q2.

US business activity, which contracted further in March in both the manufacturing and services sectors, is bolstering economists' views that the economy was already in recession.

After an initial outbreak in China brought the world's second-largest economy to a virtual halt last month, an ever-growing number of countries and territories have reported a spike in infections and deaths.

Entire regions have been placed on lockdown; and in some places soldiers are patrolling the streets to keep consumers and workers indoors, halting services and production, and breaking global supply chains.

Mirroring the emptying of supermarket shelves around the world, indebted corporates have rushed into money markets to hoard US dollars, with a global shortage of US dollar funding threatening to cripple firms from airlines to retailers.

PMI surveys from Japan showed the services sector shrinking at its fastest pace on record this month and factory activity contracting at its quickest in a decade.

This was consistent with a 4 per cent contraction in the economy in 2020, Capital Economics senior economist Marcel Theliant said.

The postponement of the Tokyo Olympics is expected to deal a heavy blow to the world's third-largest economy.

In Australia, the CBA Services PMI fell to a record low of 39.8 as restaurants, cafes and tourism were hit hard by travel bans and cancellations of events and concerts.

With most asset markets tanking, global central banks have been rolling out extraordinary measures on an almost daily basis to stop the rot.

In its latest drastic step, the US Federal Reserve on Monday promised bottomless US dollar funding.

For the first time, the Fed will back purchases of corporate bonds, backstop direct loans to companies and will "soon" roll out a programme to get credit to small and medium-sized businesses. It will also expand its asset purchases by "as much as needed". The Fed last week slashed borrowing costs to zero and took other emergency steps to keep the commercial paper, US Treasury debt and foreign dollar funding markets functional.

But some analysts said infinite monetary policy easing may not be enough, and fiscal steps are crucial. The latest US effort on that front remains stalled in the Senate as Democrats said it contained too little money for hospitals and not enough limits on funds for big business. REUTERS