The Negative Economic Impact Of The Coronavirus On China’s Economy Will Be Profound; And Its Negative Economic Impact Will Be Felt Across The Globe, Says Mohammed El Erian, Chief Economic Adviser at Allianz
Mohammed El-Erian, Chief Economic Adviser at Allianz, and former CIO and Chief Investment Officer at PIMCO, was interviewed on CNBC this earlier this week about the global economic impact of the Coronavirus — especially with regards to China. “This time, it’s different,” Mr. El Erian said. The negative economic impact of the coronavirus on China will be profound, and “cascade” across the globe, he warns. “This is a wake-up call for people [business leaders] around the world about over-dependence [supply-chain] in certain segments of the global economy.” When asked if this was a “One-off, wild-card factor,” Mr. El Erian stood his ground and warned investors “not to buy the dip this time.”
Could, or will the coronavirus disruptionpush the world into recession? It is a question CNBC posed to Stephen Roach, Senior Fellow at the Yale University School of Risk Management, and former Chief Investment Asia Officer for Morgan Stanley. Mr. Roach said that “China is flatlining now if you look at coal consumption and inner city traffic, and the economic tailwinds/rebound that China normally experiences after the Lunar New Year holiday is completely absent. Coal consumption is down about 45 percent from this time last year, and transportation is down 80 percent as of today from a year ago (Wed./February 19). So, the growth rate in China that slowed to a 27 year low in the 4th quarter of 2019 — 6 percent — could be 3-4 percent the first quarter of 2020, and marginally better in the second quarter of 2020.” Mr. Roach says he does expect “a significant rebound in the second half of 2020 as the coronavirus outbreak disappates/ runs its course.
Mr. Roach also pointed out that “Japan has now probably entered a recession, and industrial output in Germany and France plunged in December 2019, pre-virus.” “With Europe, China and Japan confronting a severe economic downturn,” at least in the immediate short-term, Mr. Roach said “the U.S. will not be the oaisis that traders and investors seem to be saying now with our rising stock market.”
The stimulus China is injecting now,” Mr. Roach said, “does noting” to relieve the economic challenges Beijing faces in the short-term, and “does nothing to arrest the draconian quarantines and ban on inner city travel. Those [restrictions] are ongoing, which is the frontline in containing this disease. This practice also “limits the 270 million migrant workers in China, getting back to their factory jobs, and put China back to work,” he said. With respect to small companies in China, Beijing is implementing special lending assistance programs,” to give them a lifeline till the coronavirus has run its course. “These measures,” Mr. Roach said, “will give impetus to the recovery,” but not do anything while the country remains on virtual lockdown.
If the global economy is as weak as I think it is,” Mr. Roach said, “the U.S. stock market could be in for a serious recokining,” in the not too distant future.
Robert Kuhn, a long-time advisor to China’s leaders and miltinational corporations, is the author of dozens of books, including, “How China’s Leaders Think,” and former Citigroup Senior Advisor on Asia, was interviewed shortly after the Mr. Roach interview on CNBC. Mr. Kuhn said the “last few days in China,” have been promising, with the number of new coronavirus cases declining. People are increasingly confident that the peak of the virus has been reached. When asked if the level of fear among the populace has peaked?, Mr. Kuhn said that “people are still afraid,” and anything related to transportation is getting hit particularly hard. With respect to transparency, Mr. Kuhn said at the beginning of the outbreak, local officials prevented information from getting to the populace in a timely fashion, and were scared to do anything without authorization. One mayor instiuted a quarantine on his own, without prior authorization; and, is now looked on as a hero. President Xi was first made aware of the virus outbreak on January 7, some two weeks prior to making any public statement. On January 20, Xi gave an order on the 20th and 22nd, and that led to a much more profound response. So, the Chinese leadership decisions in the early days of the outbreak leave a lot to be desired.
Despite all this, Mr. Roach does not believe that President Xi will be removed, or suffer consequences as a result of China’s inadaqute response to the outbreak in the early days.
Whether or not Mr. El Erian and Mr. Roach are right about the U.S. stock market suffering, remains to be seen. Traders and investors seem to be hanging their hat on the fact that central banks and the Federal Reserve has their investment backs, which a major reason why the U.S. stock market has remaind so resilient. But, with the ‘Dog Days of Summer,’ coming in a few months, the age old sentiment of “Sell in May and Go Away,’ may happen — and sooner than we expect. A lot will depend of course on whether the coronavirus does indeed peak and start to recede — and, China gets back to work. But, the negative economic impact of this outbreak is being felt in Europe, Japan, and China; and, U.S. stocks are not going to be immune, if this outbreak continues much longer. As the saying on Wall Street goes, ‘The negative economic impact of the coronavirus doesn’t matter……….until it does.’ RCP, www.fortunascorner.com