After the last crisis, China was instrumental in spurring global growth and helped pull the West and neighboring economies along with it. Through state stimulus, China achieved double-digit growth, far beyond what its underlying economy would have otherwise been capable.
This morning in metals news, Brazilian miner Vale’s iron ore production dropped 18% in Q1, U.S. total energy exports exceeded imports in 2019 and China has imposed new scrap import quotas.
We are not claiming any particular foresight on this, but a recent Reuters article yesterday covers a topic we wrote on last week concerning the disconnect between China’s aluminum smelters, which managed to raise output by 2.4% during the troubled first two months of this year, and the downstream aluminum semi-finished product producers, which all but shut down due to the enforced government lockdown in many parts of the country.
The result we and Reuters report is SHFE stocks have mushroomed from 185,127 metric tons at the end of December to 519,542 tons now, as smelters churned out metal that no one could use.
Falling infection rates to the lowest level since January and President Xi Jinping’s visit to Wuhan yesterday suggest all is returning to normal in China.
Some are looking for a V-shaped bounce back and maybe even a softer hit to Q1 GDP growth than previously feared.
A Reuters poll of Economists reported last week a revised growth forecast for the first quarter, falling to a median of 3.5% this quarter from 6.0% in the fourth quarter of 2019 — optimistically, a full percentage point lower than predicted in their last poll Feb. 14.
Manufacturers are increasingly questioning whether their supply chain is likely to be exposed to disruption from the coronavirus outbreak ravaging China.
Even if your company does not source product directly from China, many companies are still predicting supply chain disruption as the raw materials used by their manufacturing plants — which can be located anywhere in the world — probably originates in China.
As if the social cost of the coronavirus Covid-19 were not bad enough, some sectors of China’s industrial economy are suffering growing pain despite a supposed return to work last week.
The property sector, which accounts for about 40% of China’s steel consumption, is stagnant, a Reuters report states, while other steel-consuming industries are likely to be operating far below full capacity.
A recent article by respected Reuters columnist Andy Home reports on the impact of the coronavirus, COVID-19, on the supply-demand balance in China, the world’s largest consumer and producer of aluminum, and the ramifications steps taken to contain the virus could have for the market.
For the first time in more than a decade, demand in the global aluminum market fell slightly last year as trade wars and slowing consumption from the automotive sector dampened demand.
Even so, China’s massive primary aluminum industry continued to churn out metal and add new capacity.
Aluminum extrusions from China are currently subject to anti-dumping duties in the U.S., Canada, Australia and, for a more unique reason of its own, Vietnam, Aluminium Insider reported.
But despite repeated complaints from the industry and industry bodies like European Aluminium, the European Union has done no more than require a surveillance license system to report and monitor imports of aluminum into the E.U.
In a move many consider overdue, the European Commission has now opened a probe into whether Chinese exporters of aluminum bars, rods, profiles, tubes and pipes sold them in the E.U. below cost, Bloomberg reported Friday.
Not surprisingly, the steel sector in China is one of many going through acute uncertainty at the moment over fears the coronavirus spreading from Wuhan is still not under control.
As a result, it is becoming increasingly apparent steel demand is going to be down for some time to come.
The popular wisdom was this virus would peak in a week or so and a falling rate of infection would encourage relaxation of travel bans and some return to normality.
Despite noting some positive developments, the International Monetary Fund (IMF), downgraded its growth projections for 2019-2021, citing a number of pressures ranging from climate change to geopolitical tensions to extant trade tensions.
In its January 2020 World Economic Outlook, the IMF forecast growth will rise from 2.9% in 2019 to 3.3% in 2020 and 3.4% in 2021. However, the forecasts were revised downward from the IMF’s October Outlook — by 0.1% for 2019 and 2020 and by 0.2% for 2021.
“The downward revision primarily reflects negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years,” the IMF report stated. “In a few cases, this reassessment also reflects the impact of increased social unrest.”
Concerns have abounded in recent years regarding the prospect of a global recession.
Growth levels in China, for example, started to level off and then decline post-2012, albeit after a period of significant growth that would’ve been unreasonable to expect to continue. In 2007, China’s annual GDP growth soared to 14.23% but fell to 9.65% the following year, according to the World Bank. Growth has continued to slide since then, reaching 6.57% in 2018.
Similarly, Germany, the manufacturing powerhouse of Europe, has seen weakening activity. According to the IHS Markit/BME Germany Manufacturing PMI, German manufacturing activity contracted once again in 2019.
“Germany’s manufacturing sector closed out 2019 with another weak performance and remains a thorn in the side of the economy,” said Phil Smith, IHS Markit’s principal economist. “Falling goods production across the fourth quarter of the year bodes ill for final growth figures, while sustained cuts to workforce numbers at factories continue to pose a threat to Germany’s so-far solid consumer spending.
“Importantly, however, the forward-looking survey measures for new orders and output expectations both give off more positive signals as we move into the new year. What’s more, the US-China ‘phase one’ trade deal and a potentially clearer path to Brexit make for a more settled backdrop on the international stage.”
Overall, Germany’s GDP has been up and down. After a significant contraction of 5.70% in 2009, growth bounced back to 4.18% in 2019 but hasn’t reached that level since; in 2018, Germany’s GDP growth hit 1.53%, according to the World Bank.
Of course, trade tensions have weighed on economies around the world and generated uncertainty. Despite a so-called “Phase One” trade deal between the U.S. and China, the U.S. maintains an overwhelming majority of its previously imposed tariffs as a bargaining chip for compliance (and for future Phase Two negotiations, if and whenever they occur).
Throw in an escalation of Middle East tensions and a paralyzed WTO Appellate Body (currently unable to make decisions for lack of judges) and it’s not surprising that economic forecasts list more reasons for pessimism than for cheery optimism.
With that said, the Phase One deal and the U.S. Senate’s recent approval of the United States-Mexico-Canada Agreement represented positive steps toward an easing of trade-related tensions; a further rollback of U.S. tariffs on China would certainly ease tensions even more and boost certainty in the global business community.
The world will be watching to see where U.S.-China negotiations go next. Given the negotiating timeline of Phase One and the significant amount of tariffs that remain on Chinese goods, the next phase is likely to be even more complicated and tense — making an agreement before this year’s U.S. presidential election seem unlikely.
Nonetheless, the IMF did point to some positive signs, even as it revised growth projections downward.
“On the positive side, market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favorable news on US-China trade negotiations, and diminished fears of a no-deal Brexit, leading to some retreat from the risk-off environment that had set in at the time of the October WEO,” the report stated. “However, few signs of turning points are yet visible in global macroeconomic data.”
Emerging markets, developing economies
As the IMF notes, subdued growth in India accounts for “the lion’s share of the downward revisions.”
The IMF estimates India’s 2019 growth at 4.8%, 5.8% in 2020 (1.2 percentage point down from the October outlook) and 6.5% in 2021 (0.9 percentage point down from the October outlook).
“The global growth trajectory reflects a sharp decline followed by a return closer to historical norms for a group of underperforming and stressed emerging market and developing economies (including Brazil, India, Mexico, Russia, and Turkey),” the report stated. “The growth profile also relies on relatively healthy emerging market economies maintaining their robust performance even as advanced economies and China continue to slow gradually toward their potential growth rates.”
Also of note, the IMF reported that without monetary easing efforts in advanced and emerging market economies, the global growth projections would be down an additional 0.5 percentage point for each year in question.
As a whole, emerging markets and developing economies are projected to experience growth of 4.4% in 2020 (up from an estimated 3.7% in 2019) and 4.6% in 2021.
“The growth profile for the group reflects a combination of projected recovery from deep downturns for stressed and underperforming emerging market economies and an ongoing structural slowdown in China,” the IMF stated.
Growth stabilizing in advanced economies
Meanwhile, in advanced economies, growth is expected to reach 1.6% in 2020-2021, down 0.1 percentage point from the IMF’s October outlook, “mostly due to downward revisions for the United States, euro area and the United Kingdom, and downgrades to other advanced economies in Asia, notably Hong Kong SAR following protests).”
In the U.S., the IMF projected growth to fall from 2.3% to 2.0% in 2020 and 1.7% in 2021.
In the euro area, growth is expected to pick up from 1.2% to 1.3% in 2020 and 1.4% in 2021.
In the U.K., growth is expected to stabilize at 1.4% in 2020 and 1.5% in 2021, as the U.K. prepares to formally withdraw from the E.U. at the end of the month (after which attention will shift to the type of trade arrangement that can be reached between the two parties in a post-Brexit world).