Factory activity drops as the coronavirus shock deepens

Apr 2, 2020 1:10 AM ET

LONDON / TOKYO / WASHINGTON (Reuters) – Factories in large parts of the world fell silent in March as the coronavirus pandemic paralyzed economic activity. There was growing evidence that the world was slipping into a deep recession.

FILE PHOTO: A worker welds on a market under construction in Kunming, Yunnan Province, August 12, 2015. REUTERS / Wong Campion

Manufacturing activity has declined, as surveys on the Purchasing Managers’ Index (PMI) showed on Wednesday, with the strong slowdowns in export power plants such as Germany and Japan overshadowing a modest improvement in China. In the United States, a widespread survey found that the decline in production was not as dramatic as feared, but orders fell to an 11-year low, indicating that the worst is yet to come.

The virus pandemic has infected more than 850,000 people around the world, forcing factories, shops and schools to close under government-imposed barriers.

This has revitalized supply chains and dampened demand for goods as consumers worried about employment prospects cut spending and stay in the house.

In the euro area, IHS Markit’s final purchasing managers’ index for manufacturing fell in March to its lowest level since mid-2012 when the monetary union debt crisis raged, and was well below the mark that separated growth and contraction. [EUR/PMIM]

Markit’s last reading of US activity in March showed the slowest production since 2009, with coronavirus supply bottlenecks being a key factor in the decline. In a competing survey by the Institute for Supply Management, the forward-looking sub-index for incoming orders fell to the lowest level since March 2009.

Meanwhile, US private sector employers cut most jobs in two and a half years in March. This emerges from the ADP National Employment Report, which is likely to underestimate the extent of job loss as the survey period before the most extensive social distancing efforts were effective. In a week in mid-March alone, 3.3 million Americans applied for unemployment benefits for the first time, and another 3.5 million or more were said to have asked for help last week.

“Looking ahead, the timing and strength of the recovery is highly uncertain as long as large parts of the domestic economy are virtually blocked and external demand remains sluggish,” said Oren Klachkin, chief economist at Oxford Economics in New York.

UK factory production shrank at the fastest pace since the debt crisis as the spread of the corona virus caused a spiral of delays and detracted from business confidence. [GB/PMIM]

Factory activity in Canada has been the slowest since October 2010.

Global fund managers interviewed by Reuters are convinced that the global economy is already in a recession, similar to the economists’ estimates in another Reuters survey. [ASSET/WRAP] [ECILT/WRAP]

As the prospect of a deep recession grows, traders made a new arrow on government bond, dollar and gold security on Wednesday .

CHINA HEALING?

Chinese factory activity improved slightly more than expected after falling a month earlier, as the PMI showed, but growth was slow, which underlined strong pressure from companies when domestic and export demand collapsed.

While the factories in China gradually resumed operations after protracted downtimes and a decline in virus cases, the country was able to relax travel restrictions. However, activities in South Korea contracted at the fastest pace in eleven years as many of its trading partners had taken dramatic measures to contain the virus’ spread.

“If you look at the Korean numbers, they’re pretty bad … They’ll probably get worse because Korea will depend on parts of Europe and the United States,” said Rob Carnell, chief economist for Asia Pacific at ING in Singapore.

“(Policy makers) have to accept the inevitable that there will be a massive global pandemic. In almost every country in the world, and certainly in our region, there is an outbreak that will reach a level that will be reached if they do not take very dramatic measures. It will get much worse, ”he said.

Japan’s factory activity contracted at the fastest pace in about a decade in March, adding to the belief that the world’s third largest economy is probably already in recession.

A separate “Tankan” survey by the Bank of Japan found that sentiment fell to a seven-year low in the three months to March, when the outbreak hit sectors from hotels to automakers.

“The Tankan clearly shows a sharp deterioration in business sentiment and confirms that the economy is already in recession,” said Yasunari Ueno, chief market economist at Mizuho Securities.

China’s Caixin / Markit PMI rose last month from 40.3 in February to 50.1 and just above the break-even point, while the South Korean IHS Markit PMI fell to its lowest level since January 2009 when the economy moved from global Financial crisis was struck.

In Japan, where the PMI has dropped to its lowest level since April 2009, the governing coalition has urged the government to secure a stimulus package worth at least 60 trillion yen ($ 553 billion).

“It is likely to get a lot worse in the coming months,” said Alex Holmes of Capital Economics in a message to customers. The survey period for the PMIs probably did not include recent locks as in Malaysia and Thailand.

The consulting firm expects global gross domestic product (GDP) to drop more than 3% this year.

Policymakers around the world have announced massive monetary and fiscal measures to mitigate the economic impact of the pandemic, keep businesses out of money and save jobs.

However, many measures were short steps to deal with the immediate damage to corporate finance and to support banking systems in the face of worries about a credit crunch.

The International Monetary Fund said the pandemic had already driven the global economy into recession and asked countries to respond with “very massive” spending to avoid bankruptcies and debt defaults in emerging markets.

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