Virus outbreak may impact level of world trade in 2020

Frankfurt

THE slow improvement in global manufacturing could be about to take a pause - or worse - as firms brace for supply-chain disruptions and a blow to demand from the spread of the coronavirus.

Factories across China are shut as authorities try to control the spread of the disease, while the nation's trade partners have cut back imports from the world's second-biggest economy in response to the outbreak.

China is the world's largest exporter of intermediate goods used by other companies in their products, which means that disruption there has ripple effects across the globe.

"This isn't necessarily a temporary slowdown," said Timme Spakman, a trade economist at ING in Amsterdam.

"The coronavirus could potentially impact the annual level of world trade in 2020, as it's not certain that factories and logistics will be able to catch up and fully compensate for earlier delays, given the limited capacity."

That's putting a dent in hopes for a better 2020 after global trade fell in 2019 for the first time in a decade.

The signing of a trade deal between the United States and China had lifted sentiment, though that has proved short-lived.

Amid a selloff in stocks on Monday, the People's Bank of China stepped in with short-term funding to banks and cutting the interest rate it charges for the money. It added a net 150 billion yuan (S$29.27 billion) of funds on Monday using 7-day and 14-day reverse repurchase agreements. The rate for both was cut by 10 basis points, driving down the cost of the money to "ensure ample liquidity".

IHS Markit's latest factory Purchasing Managers' Indexes (PMI) from around the world showed the situation was fragile even before the latest threat. While European activity is picking up, manufacturing still shrank in January in Germany, Italy, Spain, Netherlands.

According to Chris Williamson at IHS Markit, the coronavirus is among the "key risks which could alter the brightening outlook".

Others include the threat of US tariffs, trade-war escalation and Brexit.

European companies operating in Wuhan - the suspected epicentre of the outbreak - and across China have already started to flag hits to profit from extended plant closures. Wuhan is the fourth-largest city for auto production in the country, and both Peugeot and Renault have operations there.

In Asia, the PMI measure for South Korea - often viewed as a key barometer of global demand - fell to 49.8 from 50.1 in December, below the key 50 level separating expansion from contraction.

The PMI for China showed growth, though the pace softened slightly. The manufacturing index fell to 51.1 from 51.5.

Separate figures showed industrial profits in China fell more than 6 per cent year-on-year in December. Citigroup said the "macro backdrop is turning more unfriendly", and industrial earnings "may become worse before they become better".

It expects Chinese economic growth to slow sharply this quarter, and cut its 2020 estimate to 5.5 per cent from 5.8 per cent. BLOOMBERG