Graeme Wearden 

Japan’s economy on brink of recession; Cathay’s profits warning – as it happened

Rolling coverage of the latest economic and financial news
  
  

A street in Shinjuku, Tokyo, Japan
A street in Shinjuku, Tokyo, Japan Photograph: Peter Cziborra/Reuters

Afternoon summary

Time for a quick recap:

Japan has suffered its worst quarter since 2014. Japanese GDP shrank by 1.6% in the final quarter of this year, the equivalent of a 6.3% annualised slump.

Consumer spending fell sharply, hit by a recent sales tax hike, while business investment also dropped.

Economics fear that Japan, the world’s third-largest country, could fall into recession this year -- as the coronavirus hits companies exposed to China.

Germany’s Bundesbank has warned that its economy doesn’t appear to be picking up, since it stagnated in the final quarter of 2019. It also cited the coronavirus as a threat to growth this year.

Japanese bank Nomura has predicted that China’s economy is facing its biggest slowdown since the Tiananmen Square massacre in 1989.

Airline Cathay Pacific has slashed its profit forecasts, after suffering tumbling demand since the crisis began.

Markets have rallied in China, and Europe, after Beijing’s central bank cut the interest rate on its loans to businesses. It could be a prelude to a larger stimulus programme soon.

In the UK, consumer confidence has jumped.... as have house prices.

European stock markets are clinging onto their earlier gains, with the Stoxx 600 and Germany’s DAX on track for record closing highs.

It all feels a little relaxed, given the uncertainty over the coronavirus and the bleak GDP figures from Japan today.

Rupert Thompson, Chief Investment Officer at Kingswood, says:

That said, the markets do look somewhat complacent. There remains a risk that events turn out significantly worse than markets are now assuming. Epidemiologists seem to be much less sure than the markets that the epidemic is under control.

The global economic recovery may also not be quite as secure as markets would have us believe. The spread of the virus may be slowing but estimates of the disruption to Chinese economic activity have been growing. Last week’s return to work and re-opening of factories has not surprisingly been a half-hearted affair given many travel restrictions still in place.

Chinese GDP now looks likely to post an outright q/q decline in the first quarter. As for global growth, it will also be hit by the collapse of Chinese tourism and disruption to global supply chains and may grind to a halt in Q1.

Biotech's shares surge after launching coronavirus test

Shares in Anglo-French biotechnology group Novacyt have surged by over 50% today, after the company launched a molecular test to clinically detect the coronavirus.

Novacyt believes this is the first such test to be certified in the EU, following its earlier launch of a ‘research only’ [RUO] test on 31 January.

This new test can be used directly by laboratories and hospitals for the testing of patients, without needing to be validated by clinician, the company says.

Novacyt is already deluged with demand -- with requests for quotations for 288,000 CE-Mark tests since they were made available to pre-order on 14 February 2020. The Company has received orders for 40,000 RUO tests and requests for quotations for an additional 35,000 RUO tests prior to the launch of the COVID-19 clinical version.

Demand for the tests has come from China, the US and the UK, as well as many other countries around the world, adds the company, which has offices in Camberley, Surrey, United Kingdom and Vélizy-Villacoublay, France.

Novacyt’s stock has been soaring since its RUO test was launched. It was worth €0.186 per shares on 20 January, but has now rattled to €1.86 today.

Graham Mullis, CEO of Novacyt says the test can help tackle the coronavirus outbreak:

As with our research use only test, it can produce a result in less than two hours, with the added efficiency of being able to transport the test at ambient temperatures eliminating the need for cold chain shipping. It is designed to run on multiple instrument platforms commonly used by clinical laboratories around the world, which ensures our COVID-19 test can be used by the largest possible number of clinicians.

We look forward to continuing to support clinicians in the fight to contain the spread of the novel coronavirus during this public health emergency.”

What might covonavirus mean for the UK?

Nomura’s base-case scenario is that Britain isn’t particularly affected by the outbreak. But in its ‘severe scenario’ of a long, global, pandemic... growth would be almost wiped out this year, and there would be 70 deaths.

Nomura explains:

The severe scenario does not only see China’s lockdown last for longer but the disease spreads to match Chinese levels. In the UK the same proportion of cases and deaths as China (currently) would mean around 3,000 cases and 70 deaths.

Despite being far lower than typical annual numbers of flu patients in the UK, there is little doubt that the virus landing in the UK in such numbers would generate widespread panic and have a significant effect on economic activity. In this case, we think the policy response could be more significant – the Bank of England could take interest rates down close to their zero lower bound in response to the virus becoming more entrenched, though it is not obvious that fiscal policy would be loosened much further than is already planned (especially now Mr Johnson has installed his own man into the Treasury as Chancellor, who may well opt to loosen fiscal policy more than was expected under his predecessor).

Still, even more money could be directed towards health spending to help eradicate the virus. Our numbers show annual economic growth falling to close to zero in 2020 from our 0.7% base case – a similar hit to what our US team have assumed.

Nomura have also warned that Europe’s economy would be badly hurt if the coronavirus crisis continues to rage in China until the summer, and becomes a full pandemic world wide.

The Covid-19 outbreak is already hurting Europe’s economy in three ways: imports from China are disrupted; tourists visits from China are down; and economic sentiment in Europe is hit.

If China lifts its lockdown at the end of April, then these effects will be limited.

But if the lockdown lasts for longer, and the virus spreads across the globe, then eurozone GDP would shrink this year -- with both Germany and Italy in a full-blown recession.

Today’s report warns:

If China’s lockdown measures continue for the entirety of H1 2020, but more importantly if the infection becomes pandemic, fear would likely increase dramatically in Europe and activity across all walks of economic life would be affected to some degree.

A more prolonged slowdown in the Chinese economy would lead to even weaker trade flows, with Germany the most significantly affected among the big four. Supply chains would suffer from severe disruptions, while the spread of the virus to Europe would likely cause a domestic demand shock, with both consumption and investment being hit.

In that case we assume euro area GDP would slow to -0.1% y-o-y in 2020 from our base case of 0.7% yo-y. Both Germany and Italy would likely fall into recession in 2020, and we would not exclude the possibility of further monetary policy loosening including lower interest rates and potentially a step-up in the asset purchase programme. Fiscal policy may need to be deployed more proactively too.

Nomura: China faces worst slowdown since Tiananmen Square

Analysts at Japanese bank Nomura have published a detailed report on coronavirus -- which is packed with concerning forecasts.

Their base case scenario is that China’s growth rate will fall to just 3.0% year-on-year in the current quarter, down from 6% in 2019, with a firm risk of an even bigger slump.

That would be the worst performance since the aftermath of the Tiananmen Square massacre in 1989.

Nomura say:

So much damage has already been done to China’s economy that, even with the lockdown easing in March, it is too late to avoid what is likely to be the largest quarterly drop in real GDP growth since the Tiananmen Square incident in 1989.

This base case scenario shows growth recovering during 2020 as factories and offices reopen, and supply chains catch up.

But in Nomura’s worst-case scenario, the economy actually flatlines this quarter with just 0.5% growth. Full-year growth falls to 3.9% in 2020 (down from 5.7% originally forecast).

Nomura points out that the lockdown measures imposed since the crisis began have hurt businesses, hampered production levels, and damaged consumer spending:

China’s economy is experiencing “the rare case of simultaneous demand and supply shocks”, they warn:

Because COVID-19 in China is far worse than SARs in terms of breadth and speed of infections, the ‘fear factor’ among China’s population is palpable, with people shunning crowded places like shopping malls and restaurants, crimping consumption, which contributed nearly three-fifth of China’s GDP growth last year

China’s central government has been pushing local provinces to get back to business, but there is resistance on ground.

Nomura’s Ting Lu says “this appears to be a classic case of prisoners’ dilemma”, with local politicians unwilling to risk being blame for more infections.

If a local government official heeds the call of Beijing and eases its local lockdown measures, unblocks roads connecting to other regions, and shifts its focus to reopening factories and shops, the gain would be quite limited if other governments continue to limit commerce and the national logistics network remains in shambles.

Also, this local government would be risking a rapid rise of infections in its territory. If that happens, the local government officials could take all the blame, and may even lose their jobs and be subject to further penalties.

We believe this special “prisoners’ dilemma” mechanism is also playing a key role why business activities have been so slow to resume.

Back in the UK, household confidence has jumped at its fastest rate in over a decade -- perhaps a sign that the Boris Bounce is real....

Bundesbank: Coronavirus threatens German economy

Just in: Germany’s central bank has warned that its economy is still struggling, and could suffer from the coronavirus crisis in the months ahead.

In its monthly update, the Bundesbank says it can’t see any economic change in Germany this quarter -- which is disappointing, as the economy stagnated in the last quarter of 2019.

The Bundesbank says:

For the first quarter of 2020, there are still no signs of a fundamental economic change in Germany.

With regard to industry, the downward trend in incoming orders continued until the end of 2019, albeit with a further decrease in intensity,.

However, the mood in this sector of the economy has visibly improved recently. This could indicate that the downward pressure on industrial production is gradually easing....

However, economic risks exist with regard to the coronavirus outbreak in the People’s Republic of China.

Here’s our news story on Cathay Pacific’s profits warning:

Cathay Pacific Group Chief Customer and Commercial Officer Ronald Lam says his company has endured its toughest Chinese New Year ever.

Lam explains that the company’s performance declined dramatically in the last week of January, as the novel coronavirus situation became more severe. This forced the company to cut capacity, and warn today that results for 2020 will be worse than hoped.

Lam says:

“This was the most challenging Chinese New Year period we have experienced. As the novel coronavirus outbreak in mainland China intensified towards the end of the holiday period, travel demand dropped substantially.

With more governments worldwide having imposed travel restrictions on passengers from mainland China and in some cases Hong Kong, we are seeing continued cancellations of bookings.

We have since taken a series of short-term measures in response. These notably include the sharp reduction of capacity across our global network. For February and March, we have now reduced our overall passenger flight capacity by approximately 40%, representing further reduction since our recent announcement.

Passenger capacity reduction is also likely for April as we continue to monitor and match market demand. Meanwhile, we have kept our freighter capacity intact.

The full statement is online here.

Here’s Danny Lee of the South China Morning Post on Cathay Pacific’s warning:

Cathay has also reported a 3.8% drop in total passenger traffic last month, compared to January 2019.

Incoming passenger numbers to Hong Kong fell 40% -- a staggering slump, which is actually better than the 46% slide seen in November and December.

Speaking of airlines....flights from Heathrow today are still being affected by computer problems:

Cathay Pacific issues coronavirus warning

Ouch! Airline group Cathay Pacific has just warned that the coronavirus outbreak will have a “significant impact” on its financial results.

Hong Kong’s flag carrier says it has slashed capacity by 40% in February and March having suffered a drop in passenger numbers since the crisis began.

Cathay was already being hit by the pro-democracy protests in Hong Kong, so the coronavirus is another blow -- leading to fresh cancellations and refund requests from customers.

Cathay Pacific warns:

“The first half of 2020 was already expected to be extremely challenging financially,”

“As a result of this additional significant drop in demand for flights and consequential capacity reduction caused by the novel coronavirus outbreak, the financial results for the first half of 2020 will be significantly down on the same period last year.”

Coronavirus 'hitting diamond market'

The coronavirus crisis has hurt the diamond market, according to London-listed Petra Diamonds this morning.

Petra told the City that sentiment in the precious jewels market has “significantly weakened “due to the outbreak of the coronavirus in China.

Operational cash flow benefits are being eroded by a weaker diamond market, due to the outbreak of the coronavirus, which has served to significantly reduce activity across the pipeline.

Diamond sales have been hurt by the retail stores over the important Chinese New Year period. The subsequent postponement of the Hong Kong International Diamond, Gem and Pearl show from early March to mid-May has also damaged confidence.

Petra warns that the market could be weak until Covid-19 is under control:

The virus is expected to further impact diamond trading and consumer spending in this region (ca. 14% of diamond sales) and further afield, with the end result that activity is expected to reduce across the diamond pipeline until the virus is brought under control.

Petra also reported a 6% drop in revenues in the last six months, due to a drop in rough diamond prices.

Updated

Overnight, ratings agency Moody’s has warned that the coronavirus has dented optimism just as global economy showed signs of stabilization.

In a new report, Moody’s explains that it has cut its growth forecasts due to the impact of the coronavirus. It now expects the G20 to grow by 2.4% in 2020, down from 2.6% previously.

It also warns that the global economy faces “severe” downside risks if the coronavirus grows to pandemic proportions.

Moody’s vice president Madhavi Bokil explains:

“The outbreak will first and foremost hurt China’s economy by lowering discretionary consumer spending on transportation, retail, tourism and entertainment. There is already evidence - albeit anecdotal - that supply chains are being disrupted, including outside China. Furthermore, extended lockdowns in China would have a global impact given the country’s importance and interconnectedness in the global economy,.

“With the virus continuing to spread within China and to other parts of the world, it is still too early to make a final assessment of the impact on China and the global economy.”

European markets lifted by China stimulus hopes

European stock markets have shrugged off Japan’s dire GDP report.

The main bourses are all up this morning, with Germany hitting a new record high.

In London, the FTSE 100 has gained 16 points, or 0.2%, to 7425 points - recovering some of Thursday and Friday’s losses.

Traders are cheered by the news that Beijing’s central bank has lowered the interest rate it charges commercial banks for loans. That is means to encourage lending, and could be a sign that the People’s Bank of China will cut its benchmark rates soon.

Economists at ING also believe Japan will sink into a recession this quarter, dragged down by weak spending.

They told clients that:

“Consumer spending, which slumped following the tax hike in the fourth quarter of 2019, will now struggle to do anything except contract further in the first quarter as the impact of Covid-19 weighs on consumer sentiment, weighing in particular on the consumer services sector.”

“Some further government spending may help to curb any further contraction in GDP beyond 1Q20. But that will not stop what started off as a technical downturn from evolving into a full-blown recession.

Japan’s habit of reporting GDP in annualised terms is causing some confusion this morning.....

The 2019 growth league table

We’re still waiting for Canada to cough up its GDP report for the final three months of 2019.

But most other major countries have satisfied our thirst for data, and we can see that Japan was the worst-performing major economy last year.

America was the strongest member of the G7, followed (some way behind) by the UK. Germany, France and Italy all had a poor year -- dragging the wider eurozone down too.

Economist Rupert Seggins has rounded up the details:

Japan’s stock market fell following its weak GDP report.

The Nikkei lost 164 points or 0.7%, as it ended today’s session at 23,523 points.

Other Asia-Pacific markets did better, though. China’s CSI 300 index jumped by over 2% on talk of a Beijing stimulus package to protect its economy from the coronavirus damage.

Updated

BoJ governor hints at stimulus moves

The Bank of Japan governor, Haruhiko Kuroda, has hinted that he could ease monetary policy if the coronavirus outbreak hurts the Japanese economy.

Kuroda told the Sankei newspaper that Covid-19 virus was the “biggest uncertainty” facing Japan’s domestic economy, adding:

“We would need to consider monetary policy steps if (the virus outbreak) significantly affects Japan’s economy.”

Japan’s economy was also hurt by super-typhoon Hagibis, which struck the country last October.

The biggest storm to strike Japan in decades killed at least 90 people, causing widespread flooding and damage to property and infrastructure.

Takeshi Minami, chief economist at Norinchukin Research Institute, says this was one reason Japan’s economy shrank so sharply last quarter, along with the sales tax hike.

Minami told AFP:

“There was a hit from natural disasters but consumer sentiment was particularly weak after the tax hike despite government measures to ease the impact.”

Updated

Taro Saito, executive research fellow at NLI Research Institute, is also bracing for recession, telling Reuters:

“There’s a pretty good chance the economy will suffer another contraction in January-March. The virus will mainly hit inbound tourism and exports, but could also weigh on domestic consumption quite a lot.

If this epidemic is not contained by the time of the Tokyo Olympic Games, the damage to the economy will be huge.”

Here’s more reaction -- none of it particularly positive:

Josh Mahoney of IG is worried that the coronavirus will drive Japan’s economy lower.

John Ferro of Bloomberg is worried that two of the Big Four economies are at risk of recession.

Robin Bew of the Economist Intelligence Unit fears Japan will struggle until the summer (when the Tokyo Olympics could lift growth).

Updated

Experts: Japan at risk of recession

Japan’s economy is now on the brink of recession after shrinking last quarter, and many economists fear it could soon topple in.

The coronavirus outbreak is a clear threat to Japan’s economy, given many Japanese manufacturers rely on Chinese companies in their supply chains. Scores of major firms have already closed their factories across China, which will quickly hurt production output.

A second consecutive contraction this quarter would means recession:

Daiwa Securities economist Mari Iwashita explains:

“Because of the effects of the novel coronavirus, weakness in consumption will likely continue in the January-March period.

Exports and production could be dreadfully weak as the supply chain is interrupted.”

Robert Ward, Japan chair at the International Institute for Strategic Studies, fears Japan’s economy may struggle to grow this year.

Danske Bank analysts also fear recession after today’s “gloomy” Japanese GDP figures, telling clients that:

The economy shrank at an annualized pace of 6.3% q/q in Q4, the deepest contraction in five years. The impact of the VAT hike and typhoon Hagibis weighed on economic activity and recession fears are mounting amid the coronavirus outbreak in neighbouring China.

Updated

Introduction: Japan's economy stumbles

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Worries over the global economy have intensified today, after Japan’s economy suffered its sharpest contraction in five years.

Japanese GDP shank by 1.6% during the last three months of 2019, new government data overnight shows. That equates to an annualised contraction of 6.3%, against forecasts of 3.9%.

That’s a very sharp decline, and much worse than economists had expected. It means Japan has suffered its worst quarter since 2014 -- and its second largest slump since the financial crisis more than a decade ago.

Consumer spending fell by 2.9% during the quarter, for the first time in over a year, led by weaker demand for cars, household appliances and alcohol.

Tokyo’s government must shoulder some blame -- they were warned that hiking Japan’s sales tax to 10%, from 8%, last autumn would hurt consumption.

Business investment also dropped, driven by weaker spending on construction and production machinery.

And in another worrying sign, imports and exports both declined.

It underlines that Q4 2019 was bad time for the global economy, with growth slowing in China, the UK and Germany stagnating, and France and Italy contracting.

Adam Cole of RBC Capital Markets says fears over Japan’s economy are on the rise.

Consumer spending fell almost 3% q/q, more than reversing the Q3 rise (0.5%) as households reacted to the October consumption tax increase.

Private capital spending also slumped and the data will prompt talk of recession if the monthly data look like they are adding up to another fall in Q1.

Otherwise, it could be a quieter day in the markets....especially as Wall Street is shut for President’s Day.

The agenda

  • 10am GMT: Eurozone construction output for December
 

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