Economic damage coronavirus to come

The growth in the third quarter meant that the German economy, just like in 2018, narrowly escaped a recession. The Ifo index in Germany is falling again, after a rebound after the summer of last year. The decline was especially visible in the services sector, the sector that kept the economy afloat when the industry was faced with heavy weather. Companies' expectations for the near future have deteriorated.

There was a contraction in France and Italy, the second and third largest economies in the European monetary union. The British economy also stagnated. Japan also saw a contraction, the largest in almost 6 years. Thailand reported the lowest economic growth in 5 years. The Singapore government has not ruled out a recession this year. South Korea did report growth, but this appeared to be mainly due to government spending. Just like in the Philippines.

Corona and the decline in growth
The decline in growth in the world started when Corona was still just a beer brand. The coronavirus emerged in mid-January, meaning its impact will hit the figures for the first quarter of this year. The virus has already significantly disrupted the Chinese economy, almost certainly causing the growth figure for the first quarter to be poor.

Given China's share of the global economy and its role in the production process of companies in Europe and the US, it will take nothing less than a miracle for the economies to remain unaffected. The tech giant Apple's sales warning due to the coronavirus can only be a harbinger of what is to come.

It is not surprising if the economic damage outside China only really takes effect in a few months, when the disruption in supply channels becomes clearly felt. Now factories in the West still have the necessary parts and they were probably sent for another few months before the lock down in China. Unless the situation normalizes quickly, new shipments will not occur.

Factories not fully open
According to the latest reports, Jaguar has parts for production for another 2 weeks. Jaguar is the rule rather than the exception. The American Chamber of Commerce in Shanghai announced earlier this week that almost 8 in 10 American factories in China have not been able to open (fully) until now. That effect will trickle down the production chain to the US itself.  

Because the slowdown in growth started before the corona outbreak, this does not mean (even if the spread stops quickly) that the economy will recover quickly. There was no recovery to begin with, it seems. The news that could boost world economic growth this year and reduce uncertainty on the financial markets was the signing of the partial trade agreement between China and the US. 

Delay threatens for trade agreement
In any case, the question was whether China could fulfill the agreements. We must take into account that tensions and uncertainties will return on that front. Due to the coronavirus, the implementation of the agreements may even be formally postponed.

There are calls in China to invoke the force majeure clause in the treaty, which allows the suspension of the agreement. The agreement stipulates that 'in the event of a natural disaster or other unforeseen event over which the parties have no control', compliance with the agreements can be suspended.

For example, China can acquire quite a few aircraft and machines from the US in the near future. But with the airlines being hit very hard, that is not obvious. The same applies to the purchases of other heavy equipment.

New requirements on the table
To suspend the agreement, China and the US must sit down to agree. It is expected that the Americans will agree, but also that they will put new demands on the table in exchange for that agreement. Which in turn can cause tensions and uncertainty. 

My expectation for this year was that economic growth will be lower than what institutions such as the OECD, the IMF, the ECB, etc. indicated. A recession at the end of this year or early 2021 does not surprise me. In the near future, you should not be surprised if the aforementioned institutions adjust their growth estimates downwards.

This, and especially the economic and political situation in Germany, increases the chance of a more stimulative budget policy when the German government finally adopts the budget for 2021 after the summer of this year. It also increases the likelihood of even looser monetary policy in the world and the eurozone, which could take the form of an announcement that the ECB's asset purchase program (QE) will last longer and/or be stepped up.

Downward pressure
Under such circumstances, long-term interest rates initially come under further downward pressure. In view of a more stimulative fiscal policy in Germany and an economic recovery in the long term - which could also boost the very low inflation (expectations) - there is a good chance that German long-term interest rates will rise in the medium term.

In such an environment, eyebrows are raised if the dollar can strengthen and US stocks outperform those in China and Europe for a while.