Saturday February 22, 2020
China’s standstill is contagious
Here the virus has hit the economy fully
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The effects of the corona epidemic can no longer be overlooked. In China, hardly anyone buys a car, container trips are canceled, airlines predict losses in the billions. Is there a global recession looming? Is this the beginning of the end for the globalized global economy?
Even though the number of infected people is declining, the coronavirus China still has a firm grip. Public life is still largely restricted. Production in industry is starting up slowly. Estimates to date assume that the Chinese economy will only return to normal in late March, perhaps even in April – provided the virus continues to decline.
Economists expect the Chinese economy to grow much more slowly in the first quarter after weeks of standstill. The growth of the second largest economy in the world could be halved from six to three percent. China now contributes 17 percent to global economic output. The question is what consequences the disease standstill will have on the global economy. Figures from the Chinese central government had to be used with caution even before the epidemic. The brake tracks in the domestic economy by the virus are a particularly sensitive issue for the central government.
China’s President Xi Jingpin tried to spread optimism a few days ago despite an acute crisis on state television: The People’s Republic will reach its goals in 2020 despite the virus, he promised. He didn’t give numbers. The government at least admitted a slump in foreign trade on Friday. “We expect import and export growth to slow sharply in January and February,” Li Xingqian, director of the Department of Commerce’s foreign trade department, said at a press conference. However, he also failed to provide specific figures. China’s exports contribute about a fifth of the world exporter’s gross domestic product.
The International Monetary Fund (IMF) only speaks of downside risks for China and the rest of the world. It is too early for concrete economic forecasts, said IMF chief Kristalina Georgieva this week. The EU Commission’s economic outlook for the three largest economies in the eurozone was also vague. One was “not optimistic”, it said shortly. Because of China’s important role in the global economy, the virus crisis will have a negative impact, said EU Economic and Monetary Affairs Commissioner Paolo Gentiloni when presenting the winter forecast.
Air France-KLM: the situation has “changed brutally”
While economists are still brooding over numbers, the consequences of corona paralysis are becoming increasingly noticeable for companies. China’s passenger car sales slumped over 90 percent year-on-year in the first 16 days of February, according to the latest China Passenger Car Association (CPCA) figures. Provided the epidemic is contained in April, losses of ten percent are expected for the first half of the year. The Chinese Ministry of Commerce has already promised measures to stabilize the car market. China is the largest car market in the world. Last year, more than 25 million vehicles were sold here.
Aviation is also feeling the Chinese doldrums. The International Air Transport Association, IATA, estimated that revenue losses this week would be $ 27.8 billion. It is assumed that the number of passengers will decline by 13 percent in the year as a whole. The slump mainly affects airlines in China. However, the consequences of the corona virus also have an impact on the major European airlines Lufthansa and Air France-KLM.
“We currently have 13 aircraft on the ground due to the corona virus,” said a Lufthansa spokesman on Thursday. The long-haul aircraft could not currently fly to mainland China. “This has noticeable economic consequences.” The rival Air France-KLM said that if flights to China were suspended until April, that would reduce corporate profits by up to EUR 200 million by then alone. “This is our hypothesis for now, but we don’t know how reliable it is,” said CFO Frederic Gagey. “If it takes longer, the impact will be stronger.” After an initially significant increase in sales in January, the situation “changed brutally” with the spread of the virus, he added. Air France-KLM now anticipates a decline in the first quarter.
The beginning of the end of the globalized global economy?
The business of the world’s largest container shipping company is also affected by the corona virus. Due to the plant closings, Maersk expects only a weak start to the year. If fewer goods are produced in China, this also means that the shipping company can ship fewer products from the People’s Republic to Europe and North America. On Thursday, Maersk announced that it had canceled more than 50 trips to and from Asia due to falling demand. “We estimate that factories in China are 50 to 60 percent full,” said CEO Søren Skou. Maersk expects production to rise to 90 percent again in the first week of March, but Skou also warned that “there is obviously still a lot of uncertainty”.
The economic crisis is still largely confined to China. The consequences for the global economy are limited. However, the global economy has been weakened by the trade dispute between the United States and China and Britain’s exit from the European Union. “The epidemic is currently the greatest threat,” quotes the “Handelsblatt” the president of the Institute for the World Economy (IfW) Gabriel Felbermayr. “Current developments in China suddenly show how fragile the system is.” According to the economist, the virus could prove to be a “Lehman moment”. As with the bankruptcy of the US investment bank in 2008, “the matter of course is suddenly no longer taken for granted”. In his view, the current crisis could even mean a departure from the globalized global economy. “Global industrial production has been growing faster than the volume of world trade since 2008. So we are experiencing deglobalization, although the effects are still quite moderate,” says Felbermayr.
Is the global economy falling into recession?
Where the global economy will move in the coming months will depend on how the epidemic continues. The experts agree on one thing: Should it develop into a pandemic, this will trigger chain reactions in the closely networked, division of labor global economy, which will have far worse effects. Assuming that the number of infections in hundreds of thousands of countries around the world would rise to hundreds and thousands and this pandemic would continue until mid-year, DZ Bank predicts that global economic growth will shrink below the one percent mark this year. According to analysts, the global economy will fall into recession. So far, they forecast global growth of 2.8 percent.
“It would be the biggest slump in the global economy since 2008/09 and it would encounter an already tense development in world trade as well as weak economic growth in many places,” writes DZ Bank. World trade would “probably” collapse to an extent “that we have not seen since the 2008/09 financial and economic crisis”. It would be “a shock to the global economy”.
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