The Economic Fallout from Coronavirus is Heading West to Europe

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Finance

Over 78,000 novel coronavirus cases have been officially confirmed worldwide since the turn of the new year. With the death toll rapidly approaching 2,000 casualties at the time of writing, many are left increasingly wondering whether the Chinese government has lost control of the outbreak, which could lead to a global pandemic. Despite the spread of the virus appearing to slow across mainland China, health experts have warned not to become complacent and assume the worst is over.

Earlier this month, German researchers discovered that those who have contracted the new coronavirus can infect others even when no symptoms are visible. This means that some may be spreading the virus across the globe before they even show signs of being unwell. Even if the spread of coronavirus never reaches the same levels of infection as in the Far East, the aftershock of the outbreak could yet have devastating consequences for the western economy, which is heavily reliant on goods and parts manufactured and exported from China.

Coronavirus Likely to Leave German Economy Floundering

Tensions are rising especially in Germany, where the economy ground to a complete standstill in the final quarter of 2019. The flatlining of the German economy was put down to increased caution among consumers and poor manufacturing output. Even in Q3 2019, the German economy only managed to crawl to 0.2% growth. The likelihood of Germany rebounding in Q1 2020 is exceptionally slim due to the coronavirus outbreak, with China being one of Germany’s leading suppliers and customers.

Strangely, those with an eye on Euro Stoxx 50 trading, which is the index representing 50 of the biggest European blue-chip organisations in the eurozone, will have noted that the index has been on a steady upward curve during the last six months. This flies in the face of poor GDP growth and the coronavirus adversity. The underlying message of the upward Euro Stoxx 50 trend is that most retail investors believe the European economic outlook will not be defined exclusively by the coronavirus outbreak.

Some might say that this is a rather optimistic view, given that a growing number of financial analysts are reporting falling sentiment towards the German economy. The latest Zew survey saw sentiment decline by 18 points to a reading of 8.7, much worse than the 21.5 figure that many economists anticipated prior to the survey. Achim Wambach, president of Zew, confirmed that sentiment towards the “development of the export-intensive sectors of the [German] economy have dropped particularly sharply”.

The Shockwaves of Coronavirus are Rippling Through the European Car Manufacturing Industry

volkswagen car logo

With consumer spending failing to underpin the slump in German manufacturing, declining industrial orders has led to forecasts of a recession in Germany for 2020, with GDP growth down by more than 50% year-on-year in 2019. The headlines about significant job losses at German automotive brands like Daimler will do little to reassure economists. However, it’s not just the German automotive industry that’s taking a hit, with French carmaker Renault also admitting that it barely broke even in 2019 following a “troubled year”.

Renault is particularly vulnerable to the coronavirus outbreak given that it has a factory in Busan, South Korea, as well as one in Wuhan, where the virus is thought to have originated. Meanwhile, German carmakers Volkswagen and BMW are also heavily involved with major factories in mainland China too. The start of the Lunar New Year holiday saw their factories cease production and they have seen precious little action since. China is one of Volkswagen’s biggest consumer markets, now generating almost 50% of its car sales in the Far East. Elsewhere in Europe, Italian car manufacturer Fiat has also suffered supply chain issues which have accelerated the company’s plans to close down a major manufacturing plant in Serbia.

The rest of the eurozone will wait with bated breath for the release of IHS Markit’s latest composite purchasing managers’ indices (PMI), which is an index combining activity in the manufacturing and service sectors for the eurozone and its leading economies in Germany and France. If this index comes in lower than expected, it could set off alarm bells across the continent. Other assets such as copper, which is often viewed as a reliable barometer for the global economy, have also taken a nosedive of late. It’s been several years since the European economy was considered to be on such a knife-edge.

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