The slowdown in Chinese manufacturing and ripple effect on global supply chains will hit the global economy hard, even if a recession can be avoided. If the outbreak cannot be contained by summer, a crash worse than the 2008 crisis awaits America’s inflated asset markets.
By Andy Xie and cross-posted from South China Morning Post.
China’s manufacturing sector will take quite some time to get back to normal. The global supply chain is being disrupted, triggering production stoppages in other industrial centres. China will at least struggle through this month. The odds are high, and rising, that the coronavirus crisis will last through March, which may be enough to push the global economy into recession.
There is a significant chance that the crisis will last until summer. The economic disruption may pack enough of a punch to pop the biggest global bubble – centred around the US stock market – in modern history.
The coronavirus outbreak appears much more serious and more likely to persist than appeared to be the case just two weeks ago. In addition to disrupting the services sector at an estimated cost of over 0.5 per cent of gross domestic product per week, the manufacturing sector may not be able to get back to normal before at least the end of February.
Disruption in March looks increasingly likely. The longer the crisis lasts, the more likely is a global recession.
Over the past two decades, global supply chains have come to rely on China for cheap components. From automobile and electronics to shoes and garments, sourcing materials and components from China is vital to keeping the global economy humming. If China cannot get back to normal soon, the disruption may push the global economy into recession.
Many migrant workers, the main labour force for the factory sector, returned to major production centres like Shanghai and Shenzhen last week. This is already one week beyond the normal Lunar New Year holiday.
Normal precautions require these workers to be quarantined for two weeks. If everything works out perfectly, China’s manufacturing could get back to normal by the end of February.
Under the above best-case scenario, the global economy may avoid a recession. But a significant hit is unavoidable. China’s economy is obviously contracting, even though official statistics won’t show it.
The financial ramifications will be a significant drag for many quarters to come. China’s local governments and businesses have been struggling against high leverage amid slowing growth . A big hit like this will force many to retrench…