BlackRock Investment Institute

Macro insights

Assessing the coronavirus impact across Asia

The effects of the coronavirus outbreak and efforts to contain it are starting to ripple out from China. Recent data in Asia have missed market expectations. And Japan faces the prospect of a technical recession as the impact from the virus outbreak piles on top of the sharp drop in fourth-quarter GDP after the sales tax increase in October.

Citi Economic Surprise indices, 2018-2020

Sources: BlackRock Investment Institute and Citigroup, with data from Refinitiv Datastream, February 2020. Notes: The chart shows the Citi Economic Surprise Index for China, Japan and Asia Pacific excluding Japan. The index measures the pace at which economic indicators are coming in ahead of or below consensus forecasts.

More recent data releases on machinery orders confirmed the fourth-quarter weakness in Japan likely extended into early 2020. Japan had been trailing market expectations even before the virus outbreak. See the chart above. The economic surprise indices for China and the rest of Asia, excluding Japan, have started to drop again after some positive surprises over the turn of the year.

South Korean imports from China plunged in the first 20 days of February and Japan’s February flash PMI pointed to a steep fall in services activity. This highlights two ways that spillovers from China to the rest of Asia occur: along supply chains (Vietnam, Thailand and South Korea risk missing key imported inputs into production) and via weaker demand – especially a hit to tourism activity. Thailand, Hong Kong and Singapore may see a severe drop in services exports.

Central banks across the region have been quick to respond. The monetary policy authorities in Indonesia, Thailand and Malaysia have all eased policy.  The Bank of Korea is expected to follow suit on Thursday, and the Monetary Authority of Singapore has indicated that it will loosen policy at its next meeting in April.  The Bank of Japan has not signaled any action yet, and has very limited scope to ease further than it has done already.

Hong Kong has announced a record budget deficit and will hand out cash to residents in an attempt to support the economy. Authorities are also gearing up to loosen fiscal policy in China and South Korea. Singapore and South Korea seem to have the most fiscal space.

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