Coronavirus: an initial impact on confidence indicators

Chart of the week

Markit has published February’s flash PMI confidence surveys for the United States, the Eurozone and Japan. They were keenly awaited: the Chinese economy has stalled as a result of the coronavirus outbreak, sparking fears of a global downturn in confidence.

The fall in both the US and Japanese composite PMIs (respectively -3.7 to 49.6 and -3.1 to 47.0) reflects those fears, with the services PMIs falling more than their manufacturing counterparts in both cases.

In the Eurozone, confidence levels look more resilient at first glance. Indeed, the composite PMI reading even improved marginally, +0.3 to 51.6, as France’s services sector returned to normal following strike action in December and the German manufacturing PMI continued to improve (+2.5 to 47.8).

Our analysis

China’s coronavirus epidemic will significantly affect both Chinese and global growth with deteriorating confidence outside China being the primary vector of the epidemic’s economic impact. The survey data show falling new export orders and longer delivery times.

Delivery times are notably longer in Germany, which partially explains the improvement in the manufacturing PMI: longer delivery times are usually a good sign. In this particular case, as they likely reflect production line disruptions rather than strong demand, they are a ‘false’ good sign.

As things stand, our core scenario remains that of a temporary supply shock: a sharp slowdown followed by a catch-up resulting in a V-shaped quarterly growth curve. If this scenario materialises, economic growth fears should abate and enable confidence levels to recover.

However, both the extent and duration of the supply shock currently remain unclear. Everything hinges on the progress of the epidemic, pace of China’s recovery, and the impact on global production lines. With the recovery in China looking sluggish and the virus now gripping South Korea and Italy, the overall outlook is less than comforting.

 

The Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors.

 

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The opinion expressed above is dated  24 February 2020, and liable to change.

 

This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS. LAZARD FRERES GESTION – a simplified joint stock company with share capital of €14,487,500 – Paris Trade and Companies Registry No. 352 213 599. 25, RUE DE COURCELLES – 75008 PARIS, FRANCE


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Julien-Pierre Nouen

Directeur des études économiques et de la gestion diversifiée