In la Tribune 25/02/2020
As a result of the Covid 19 outbreak, 2020 Chinese growth outlook was down 10%, from 6% to 5.4%, based on the SARS impact model in 2003: tourism, transport, shops and restaurants are the most affected. This forecast envisaged economic catch-up from the end of 2020 to the beginning of 2021 thanks to the Chinese government’s stimuli: interest rates, liquidity, lower taxation, administrative benevolence, etc. But it also predicted a return to the familiar terrain of the SARS economic model as soon as the Chinese New Year celebrations ended.
Production level much lower than expected
Alas, 4 weeks after the end of Chinese New Year, the actual level of production is much lower than expected. The Covid 19 crisis is different from the SARS crisis: its morbidity rate is lower, but being more infectious it is more disruptive. As a result, the economic model of the 2003 crisis was relegated and the growth forecasts entered into sharply negative territory. Subsequently, the extent of the slide will be attached to the control of the outbreak during the month of March, it seems indeed necessary to verify that patients once cured do not remain contaminating for some time, multiplying the quarantine processes.
In the rest of the world, negative forecasts are emerging everywhere. The epidemic limited to Wuhan and its region is a scenario far behind us, it is spreading and will continue to spread everywhere, especially in the most urban and least well-controlled areas. Where to authoritatively confine the equivalent of the French population will remain a challenge… despite teleworking. As a result, the negative epidemic impact on the Chinese economy is a model that other economies could surpass: in other words, it will get worse before it gets better.
Sharply falling metal and oil prices
Copper, aluminum, nickel and zinc prices have all declined since mid-January, with no improvement since the end of the CNY. Oil has not recovered from its fall in early January, Asian LNG prices have exceptionally fallen below European prices whereas they are historically higher, coal consumption is at its lowest, the price of sea freight has been divided by three since October 2019, stocks of commodities are rising since they cannot be consumed: cement, steel and iron ore, glass…
The safe haven value
Conversely and logically, gold is selfishly the safe haven. It is no one’s debt and flattering the reptilian part of the brain he makes it repeat these verses of Lucretia: “It is sweet, when on the vast sea the winds lift the waves, to witness from the earth the harsh trials of others; not that the suffering of no one is such a great pleasure to us, but to see what evils we ourselves escape from is a sweet thing”.
This contemplation will come to an end, however, but another crisis will take over. Its origin will be more classical (debt, real estate, shares, bonds…). The outlook for gold prices in the medium term is therefore still at $2,000/T. oz, compared to $1,680/T. oz currently. The coronavirus outbreak has only accelerated the trend, which has also spread to gold mine shares. However, once the virus is under control and the vaccine is available, the search for protection from the risk will weaken as the economy catches up, particularly in the consumption of natural resources. The latter will be powerful, as the virus provoqued lost face. For China and its leader, this is almost a personal matter. Can we then imagine that China will be a step ahead if it emerges from the epidemic while other countries will enter it?
If at the beginning of March the outbreak is under control in Beijing, by the end of March the upstream part of industrial chains would be fully restarted, particularly in the electronic sector, but downstream, in the rest of the world, would consumption slow down due to the peak of contamination?
This optimistic configuration, which assumes that the epidemic will not get out of control in certain areas of the world, would result in a gap in Chinese growth in the first quarter that would affect the rest of the world in the second quarter of 2020. Let’s remain optimistic.