COVID-19 a new risk in 2020

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March 17th, 2020

The recovery of economic activity in early 2020 put at risk. Driven by a reduction in geopolitical uncertainty, in the early stages of the year the economic indicators confirmed the continuity of the recovery in economic activity initiated in late 2019. For instance, the global composite Purchasing Managers’ Index (PMI) for the month of January climbed up to 52.2 points, a clear improvement over the low point reached in October (50.9). However, this improvement is likely to suffer from the outbreak of the COVID-19 health emergency. The potential impact of this epidemic on economic activity in Q1 2020 is not negligible. Although these types of events usually pose a temporary shock to the economy, uncertainty is high. China has closed factories and urged its citizens to stay at home. This will undoubtedly have an impact on the country’s own economy, but also on other economies that are highly integrated with the country, such as Japan. Furthermore, the epidemic has spread to other advanced economies (such as Italy), so their activity will suffer not only indirectly from the economic downturn suffered by China, but also directly as a result of the coronavirus. In this regard, at CaixaBank Research we have downgraded our forecast for global growth in 2020 by 2 decimal points, placing it at 3.0%. While this is still a reasonable growth rate, if the COVID-19 epidemic intensifies there could be further reductions in the forecasts.

Monetary and fiscal policy, tools for supporting the economy. China’s central bank has begun to relax its monetary policy and it may take further steps in order to mitigate the impact of the COVID-19 virus outbreak. In fact, most emerging economies are cutting interest rates. Also, in advanced economies, the Fed announced a 50-bp interest rate cut, bringing it to the 1.00%-1.25% range, in response to the risk posed by the coronavirus. The Chinese cabinet, meanwhile, is designing fiscal measures to support the economy. Japan, another country hard hit by the coronavirus outbreak, had announced a major fiscal stimulus package focused on public expenditure measures prior to the health emergency. Finally, the euro area will also maintain a slightly expansionary fiscal policy in some regions, and the governments of Italy and Germany have already made reference to specific measures.

Another difficut year for trade flows. 2019 was a bad year for international trade. Although a far cry from the debacle of 2009, when trade flows of goods contracted by around 13% (in real terms), initial estimates point towards a slight decline in flows in the past year (–0.4%). The escalation of US protectionism dragged the trend of flows into negative territory. In 2020, the first phase of the trade deal reached between the US and China, a seemingly less belligerent US attitude towards trade and the slight recovery expected in global manufacturing activity led to expectations of an improvement in international trade. However, the outbreak of the coronavirus in China, the heart of one of the most important value chains in the world, has the potential to depress trade flows in the first few months of 2020.


China: the economy that will suffer the deceleration the most in early 2020. As the epicentre of the coronavirus outbreak, China’s economy is likely to stagnate or even shrink in Q1 2020. In fact, the official Purchasing Managers’ Index for the month of February indicates a significant deterioration in economic activity (35.7 points for the manufacturing PMI and 29.6 points in the case of services, historically low levels in both cases). Thus, despite the fact that the economic downturn caused by epidemics is followed by a rebound in activity in subsequent quarters, the economic stagnation that the country is suffering will be enough to subtract at least 4 decimal points from annual growth per our estimate of a month ago. China is therefore unlikely to grow by more than 5.5% in 2020, after advancing 6.1% in 2019. This is a sharper slowdown than expected, but it is the result of a factor that we consider to be temporary. In 2021, the country should return to the growth path it was on prior to the emergence of the coronavirus, with figures more in line with the gradual deceleration of the economy as it continues with the change of its productive model initiated some years ago (towards a greater role of the tertiary sector).

Turkey and India, the head and tails of growth at the end of 2019. The Turkish economy grew by a buoyant 6.0% year-on-year in Q4 2019, versus the 1.0% of the previous quarter, bringing annual growth to 0.9%. While this figure is clearly below the 2.8% of 2018, in recent quarters economic activity has made a significant recovery. That said, there are major concerns over the sustainability of Turkey’s future growth, with its significant inflationary pressures and high levels of corporate debt. These risk factors are particularly relevant in the face of the global pressures brought about by COVID-19. India, meanwhile, grew by a meagre 4.7% in Q4 2019, compared to 5.1% in the previous quarter (the figure for Q3 was revised upwards from 4.5% to 5.1%). The loss of buoyancy in exports and the contraction of investment for the second consecutive quarter slowed growth. Thus, the rising star only grew by 5.3% in 2019, the most modest figure since 2012.


Significant contraction of Japan’s GDP at the end of 2019, placing the annual figure at 0.8%. Japan’s GDP fell by 1.6% quarter-on-quarter (–0.4% year-on-year) in Q4 2019. Whilst a drop in economic activity in the last quarter of the year was expected, as a result of the VAT increase introduced in October and the effect of the typhoons that hit the country, it proved to be much greater than anticipated. Moreover, this disappointing figure is compounded by the highly likely negative effects of the coronavirus in the first few months of the year: it is an open economy with close trade links with China through Asia’s global value chain (China is the largest recipient of Japan’s exports and the leading source of its imports). In addition, Japan is a very popular destination for Chinese tourists (it is the main source of international tourism in Japan). Thus, following the poor GDP figure, and taking into account the effects that the coronavirus could have in Q1 2020, we have significantly reduced the annual growth forecast for the Japanese economy (by around 5 decimal points, to 0.3% in 2020).

The US ended 2019 on a solid note, but it will experience a slowdown in 2020. The US economy grew by a robust 0.5% quarter-on-quarter in Q4 2019 (2.3% in year-on-year terms), thus closing the year with annual growth of 2.3%. This is a significant figure, in spite of the protectionist measures and trade tensions with China. In 2020, growth will reduce to levels more in line with the country’s potential (around 1.8%). The very maturity of the business cycle and the fading of the fiscal boost implemented in late 2017 will support this gradual slowdown. That said, it could be more pronounced in the first few months of 2020 due to the potential impact of the coronavirus on economic activity, although this should not persist for too long. For now, the economic activity indicators show a mixed picture. On the positive side, the data for the labour market remain very strong, with healthy job creation in January (225,000 jobs). Similarly, the manufacturing indices of the New York and Philadelphia Feds indicated a significant rebound in activity in February in those parts of the country. On the other hand, both the manufacturing index of the Richmond Fed and the composite index produced by Markit for the same month fell sharply. These latest indicators may already reflect the uncertainty derived from the coronavirus outbreak.

The United Kingdom grew by 1.4% in 2019, after stagnating in Q4 2019 (1.1% in year-on-year terms). The stagnation of private consumption and the contraction of investment compared to the previous quarter, partly affected by uncertainty surrounding Brexit, explain the weak figure at the end of last year. For 2020, a somewhat clearer political outlook should favour more buoyant economic activity. Following the United Kingdom’s official departure from the EU on 31 January, in February a transition period began that will last until the end of the year and during which the United Kingdom will remain within the European single market and subject to EU rules. In addition, the terms of the new relationship between the two regions will be negotiated during this period. This will be a complicated process and will no doubt require more time than stipulated.

In the euro area, the pace of growth was modest at the end of 2019 and the outlook for 2020 remains moderate. The region grew by 0.1% quarter-on-quarter in Q4 2019, which placed the total figure for the year at 1.2%. The latest economic activity indicators also suggest that the region will maintain positive but moderate growth rates. Among other factors, of particular concern is the weakness of the German economy. It registered 0.0% quarter-on-quarter growth in Q4 2019 (0.6% for the year as a whole), hampered by a decline in investment in machinery and equipment, as well as by a stagnation of private consumption. The trend in consumption is concerning, as it had proven resilient in the preceding quarters. In addition, the country will feel the loss of buoyancy in global trade flows expected in the early stages of the year. Finally, the coronavirus epidemic gained strength in Europe at the end of the month and will probably act as another restriction for economic activity. In this context, while we have reduced our forecasts for the growth of the euro area in 2020 by only 1 decimal point, to 1.0%, an intensification of the COVID-19 outbreak in Europe could lead to further reductions over the coming months.