Newsletter: Coronavirus Closes China

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If China Sneezes, Will the World Economy Catch Cold?

Coronavirus is closing China to the world. That’s straining the global economy. Uncertainty over the virus has disrupted worldwide trade and supply chains, depressed asset prices, and forced multinational businesses to make hard decisions with limited information. The U.S., and governments in Europe and Asia are enforcing new regulations to block visitors from China and screen returning citizens, while major airlines suspended flights and companies pulled out expatriate executives, James T. Areddy reports.

• Chinese factories that were supposed to be quiet for a few days to celebrate Lunar New Year are looking at possible closures and staff disruptions of weeks if not more, threatening production plans at Apple, Tesla and Anheuser-Busch InBev.
• Economists surveyed on Friday by The Wall Street Journal lowered their expectations for first quarter Chinese growth by over a percentage point to a median 4.9%.
• Goldman Sachs on Friday said it expects the virus to reduce U.S. output by 0.4 percentage point to 0.5 percentage point, at an annual rate, in the first quarter, with growth rebounding in the second quarter, leaving minimal impact on full-year growth.
• Chinese markets dropped sharply on the first day of trading after the extended Lunar New Year. The benchmark Shanghai Composite Index on Monday posted its steepest one-day decline since August 2015.

WHAT TO WATCH TODAY

IHS Markit’s U.S. manufacturing index for January is out at 9:45 a.m. ET.

The Institute for Supply Management’s manufacturing index for January is expected to rise to 48.5 from 47.2 a month earlier. (10 a.m. ET)

U.S. construction spending for December is expected to rise 0.5% from the prior month. (10 a.m. ET)

The Iowa caucuses begin at 8 p.m. ET.

The Reserve Bank of Australia releases a policy statement at 10:30 p.m. ET.

TOP STORIES

Ripple

China’s central bank on Monday lowered key interest rates while injecting a large amount of liquidity into the banking system in a bid to support the economy. The People’s Bank of China cut the seven- and 14-day reverse repo rates by 10 basis points to 2.4% and 2.55%, respectively. The PBOC also injected 1.2 trillion yuan ($173.0 billion) into the financial system, Grace Zhu reports.

Growth in China’s factory activity slowed to a five-month low in January. The Caixin China manufacturing purchasing managers index stayed above the 50 mark that separates expansion in activity from contraction. Caixin didn’t say whether its survey reflected the impact of the outbreak of a deadly coronavirus in central China, Grace Zhu reports.

Hong Kong’s economy contracted last year, official estimates showed Monday, as global trade turbulence and months of antigovernment protests pushed the city into its first annual recession since the depths of the global financial crisis in 2009.

Europe’s factories are still in bad shape, but trending in a positive direction. IHS Markit’s purchasing managers index for the eurozone showed manufacturing activity contracted again in January, though at the slowest pace since April. “Eurozone manufacturing started 2020 with green shoots of recovery in sight. Most encouragingly, order books moved closer towards stabilization,” said IHS Markit economist Chris Williamson. The wildcard: The effect of coronavirus on supply chains. China is the world’s largest manufacturing economy, and factories around the globe rely on it for components and as a customer.

Saudi Arabia is pushing for a drastic, short-term oil production cut as it seeks to respond to the impact of coronavirus on crude demand. Representatives of the Organization of the Petroleum Exporting Countries and its allies are set to meet Tuesday and Wednesday to debate possible action after the outbreak in China, the world’s largest oil consumer, led to the worst monthly crude-price drop in 30 years, Summer Said and Benoit Faucon report.

Even before the outbreak, there were signs the American consumer had taken his foot off the gas pedal. Personal-consumption expenditures eased in December, consistent with a U.S. economy returning to a more moderate pace of growth. Spending for all of 2019 was up 4%, the smallest annual increase since 2016, according to the Commerce Department. Consumer spending accounts for about two-thirds of total U.S. economic output, and was a key support last year for the broader economy. While a slowdown in household spending could pose challenges for the economy in 2020, consumers do appear to be holding up well for now: A measure of consumer confidence in January rose to an eight-month high, Amara Omeokwe and Sarah Chaney report.

Time for Me to Fly

Boeing’s decision to halt production last month of the troubled 737 MAX is likely to reduce U.S. gross domestic product in the first half of the year. Boeing had been building about 42 jets a month since April, and about 52 a month before that. That might not sound like a lot. But the 737 MAX sells for about $55 million apiece, and Boeing had planned to sell more than 600 this year, totaling more than $30 billion. It uses a network of 600 major suppliers providing everything from engines to seats to bathrooms. Boeing’s Seattle-area factories alone employ 12,000 workers on the MAX. The result: At least three leading economists say the shutdown will reduce first-quarter GDP by half a percentage point. Second-quarter output could also take a hit, Josh Mitchell and Doug Cameron report.

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

What the frack. “This paper examines the impact of the U.S. fracking boom on local [sexually transmitted infections] transmission rates and prostitution activity as measured by online prostitution review counts. We first document significant and robust positive effects on gonorrhea rates in fracking counties at the national level. But we find no evidence that fracking increases prostitution when using our national data, suggesting sex work may not be the principal mechanism linking fracking to gonorrhea growth,” Baylor University’s Scott Cunningham, Claremont Graduate University’s Gregory DeAngelo and Montana State’s Brock Smith write in a research paper.

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