If you want to know how badly the coronavirus is about to devastate the US economy, look at China

March 18, 2020

By: The Working Forest Staff

Linette Lopez, Business Insider — Before the coronavirus made it to the US, I remember listening patiently as a hedge-fund guy explained to me that the market (then at record highs) was actually cheap.

He explained how, theoretically — given this, that, and the other technical finance term — it could continue to go up forever. This almost seemed like a safe assumption in a news cycle where nothing, not even the president assassinating an Iranian military leader, could stop stocks from rallying.

This, the hedge-fund guy said, was how a lot of funds were thinking about the market at the time. Limitless.

I said that was all very cute but reminded this gentleman that his model wouldn’t mean anything the moment something, a major event, eventually happened. Big things do happen, and in markets one should never lean on the word “forever.” So his theory wasn’t really worth much. In unprecedented situations, everyday models and predictions are bound to fail.

If it seems like the coronavirus outbreak caught Wall Street totally unaware, that’s because, for the most part, it did. A couple of weeks ago, the mantra on the Street was still “nothing matters.” Buy stocks. Now all that has changed. A recession is coming, one featuring a collection of economic problems we have to solve all at once.

In the coming weeks, you will hear myriad prognostications about the US economy. Largely, these will be made by people who’ve been quickly, desperately revising their rosy estimates for the economy down, and then down again, over the past week. On Monday, Goldman Sachs said US gross domestic product could contract by 5% in the second quarter, which would be a drop not seen since the depths of the financial crisis.

Just how quickly the US economy recovers depends on how well Americans practice social distancing, how quickly coronavirus testing is ramped up, how much help the government is willing to help American families and businesses, and, finally, how much confidence Americans have in going back to their daily lives when this is all over. All of this is impossible to model or predict.

What we do have, though, in the absence of credible assumptions, is comparison. So if you want to know what’s going to happen to the US economy, you may want to look less to Wall Street and more to China.

Long, hard slog? Or short, sharp shock?

China has been fighting the coronavirus outbreak since mid-January, when officials finally admitted that it had spread all over the country and had taken particular hold in Hubei province and its capital, Wuhan.

They fought the virus much in the same way it looks like the West will have to, though with all the draconian trappings of an authoritarian government: By shutting down the entire country and setting up a system to separate the sick from the healthy.

What that effort has done is devastate China’s economy in the first two months of 2020:

  • Over that time, China’s industrial production fell by 13.5%, and its service production fell by 13%.
  • Manufacturing production was hit especially hard, falling by over 15%.
  • Automotive production fell by a whopping 32%.
  • New housing starts fell by 44%, and there was a 23% drop in housing completion.
  • Retail sales fell by 23% in real terms.
  • And finally, because of work disruptions, exports fell by 17%.

Earlier this month, Charlene Chu of Autonomous Research told me she expected Chinese GDP to fall by 12% in the first quarter, though the government will never print anything like that. The Chinese Communist Party has tried to strike an optimistic tone, but that belies how slowly things are getting back to normal.

Technically, China reopened on February 10, but Autonomous noted that, according to the Ministry of Industry and Information Technology, only 33% of small and medium-sized businesses had returned to work by February 26.

Once you stop a machine as big as the Chinese economy, it can take a while to start back up again. Small businesses need to be rescued, the sick still need care, 50 million migrants still haven’t returned to their jobs, analysts are watching to see whether heavily indebted companies default, and China’s banks — which suffered a mini crisis last summer — are expected to extend themselves as much as they can.

All of this means that the economy is still weak and that recovery will mean a longer, harder slog than Wall Street first assumed. And some — though not all — of those maladies are about to be inflicted on the US economy.

See more HERE.

 

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