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IHS Markit: Big hit to economic outlook due to COVID-19

March 10, 2020
Chemical Value Chain

Economic growth rates are likely to decline significantly throughout the world in the coming months, as coronavirus disease 2019 (COVID-19) takes a toll on demand and supply, according to IHS Markit.

In an interim forecast released today, IHS Markit estimates that global GDP growth will total 1.7% in 2020, compared with a prior forecast of 2.5%, due to widespread economic damage from COVID-19. US GDP is now expected to grow by 1.8%, and Chinese GDP by 4.3%, with a recession likely for the eurozone and Japan.

“The global spread of COVID-19 is the single biggest shock facing the world economy in early 2020,” says Nariman Behravesh, chief economist at IHS Markit. “The damage to economic activity, both because of the virus itself and the ensuing policy response, is becoming larger by the day.”

As the COVID-19 situation is rapidly evolving, forecasts are likely to be amended, with revisions largely in negative territory. “We can guarantee revisions will be mostly downward in the near term,” Behravesh says.

Slow bounceback

The current model forecasts the number of COVID-19 cases peaking during the third quarter of this year, although there is considerable uncertainty around this figure. “These things in the past have tended to peak during the summer months,” Behravesh notes. However, there has been speculation that warmer weather could eliminate the virus, albeit temporarily.

Regardless, the economic damage will amount to “a demand and supply shock,” Behravesh says. Services will be particularly hard-hit due to sudden and steep declines in travel and tourism, as well as the cancellation of events involving large groups of people. On the supply side, production outages in China have already hit supply chains, and further disruptions in other parts of the world are possible. “There is major disruption to supply chains causing ripple effects across the world,” Behravesh says. “Some have referred to the supply-side effect as a human credit-crunch.”

The manufacturing sector is by no means immune. Industrial production will take a very significant hit, according to IHS Markit. The JP Morgan global purchasing managers’ index (PMI) “plunged by a record extent in February, the pace of expansion slowing to the weakest level since May 2009,” IHS Markit adds. The chemicals PMI reading for February was third-lowest of the 23 sectors tracked, trailing only metals and mining, and automotive and auto parts.

The chemicals sector has been particularly hard hit by the supply outages in China over the past several weeks, as has the automotive sector and the electronics sector, according to Behravesh.

The economic recovery is expected to take some time. “It will be a u-shaped recovery,” Behravesh says. “It will take some time for consumers and households to feel comfortable going to places where they share space with other people.” However, a meaningful recovery is expected. “People have compared this to 2008–09, but it’s really quite different,” Behravesh adds. “We will get an upturn here, the question is when.” Right now, IHS Markit does not expect that upturn to be until late this year, with growth remaining below the baseline trend into 2021.

Markets wiped out

Stock markets continued their plunge on Monday morning, as the spread of COVID-19 accelerated over the weekend and Italy announced a lockdown on its northern provinces, which have seen a severe outbreak of the virus. The S&P 500 is down by more than 5%, with indices in the UK and Japan posting similar declines.

Chemical industry stocks have taken an even-larger hit. A composite of 32 industry stocks tracked by CW is down by an average of about 12% so far today. Dow and Chemours have seen share-price drops of about 20%.

Concerns have also arisen around credit markets, particularly in high-yield debt related to the energy sector. Oil prices plummeted this morning, partly due to the demand shock from COVID-19, but also partly due to an anticipated supply glut as Saudi Arabia and Russia embark on a price war. Debt issued by shale oil-and-gas producers in the US could lose a big chunk of value, market watchers say.

The bull run in equities does appear to be over, at least for now. “Our view is that the stock market drop will exacerbate … the severe tightening of the financial picture in the US,” Behravesh says. “You are not going to hear a lot of talk about the market being overvalued for quite some time.”

By Vincent Valk

Source: Chemical Week

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