Coronavirus Impact on Global Economy More Muted Than Expected - The Wall Street Journal

Paul Hannon

The Wall Street Journal

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Feb. 21, 2020 6:42 am ET

The coronavirus epidemic that began in China is taking a toll on businesses in Europe and Japan, but the initial impact has been more modest than feared, according to surveys released Friday.

China’s government has responded to the outbreak by imposing travel restrictions and quarantine requirements, forcing many workers to stay at home, while shipments of goods into and out of the country have been interrupted.

A number of businesses based outside China have already warned those measures will have an impact on their production, as they run low on Chinese-made inputs or can’t deliver finished goods to Chinese buyers.

Surveys of purchasing managers at businesses released Friday showed the epidemic had further weakened growth in Japan, and hit export orders in Germany. But the impact on Europe’s industrial powerhouse was less severe than feared.

Japan’s economy, the world’s third-largest, contracted in the final months of 2019, and the coronavirus appears to have dimmed hopes of a quick rebound. According to a survey of 800 businesses by data firm IHS Markit, activity in the private sector fell at the sharpest rate since April 2014 during the first few weeks of February.

A fall in tourism from China was partly behind that drop, but manufacturers also suffered from a drop in export orders. Speaking to lawmakers, Bank of Japan Gov. Haruhiko Kuroda said it is too early to decide how to respond to the setback.

“It is not at the stage for us yet to discuss specific monetary policy reaction,” Mr. Kuroda told a parliamentary committee. “We won’t hesitate to take additional easing action, if necessary.”

Mr. Kuroda will join other central bank and Treasury chiefs from the Group of 20 leading economies at a long-planned meeting in Saudi Arabia on Saturday and Sunday. They will discuss the likely impact of the coronavirus on the global economy, but they are unlikely to see a need for urgent action to support demand through interest-rate cuts.

Data released Friday showed the coronavirus epidemic had further weakened growth in Japan and hit... — Data released Friday showed the coronavirus epidemic had further weakened growth in Japan and hit export orders in Germany. But the impact on Europe’s industrial powerhouse was less severe than feared.
Photo: /Associated Press

That is because the course of the outbreak is highly uncertain. If it can be contained in China, with a return to more normal working conditions in the nottoo-distant future, most economists think the global impact will be modest. If it breaks out of China and spreads across the rest of Asia, the economic impact would be much larger.

For the time being, the impact of the outbreak on Europe has been slight. IHS Markit said the composite Purchasing Managers Index for the eurozone—an aggregate measure of activity in the services and manufacturing sectors—rose to 51.6 in February from 51.3 in January, reaching its highest level in six months.

However, there were signs that future levels of activity may be more subdued, with widespread reports that supply chains have been interrupted.

“The fragility of global supply chains means that even small disruptions in China could spell large repercussions for Europe down the line,” said Oliver Rakau, an economist at Oxford Economics. “In that sense, the PMIs are a welcome sign of resilience, but they provide a false sense of security.”

Some companies have acknowledged that the shutdowns in China have been disruptive. Apple Inc. on Monday said the coronavirus outbreak had limited iPhone production for world-wide sales, while Fiat Chrysler Automobiles NV said last week it temporarily halted production in Serbia because it couldn’t get parts from China.

The global economy grew at the weakest pace since the financial crisis in 2019. Prior to the outbreak in China, most economists had expected to see a modest pickup this year as trade tensions ease, but that is now in doubt.

The new headwind comes as many central banks appear low on ammunition with which to provide fresh stimulus, having been unable to return their key interest rates to more normal settings after slashing them in response to the crisis.

The European Central Bank has already lowered its key interest below zero and bought €2.6 trillion ($2.8 trillion) of bonds under a program known as quantitative easing. It has appealed to eurozone governments to do more to boost weak growth, but so far to little effect. However, eurozone finance ministers Monday agreed that they would aim for “a more supportive stance” if the economy were to slow further.