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

Rolling coverage of the latest economic and financial news, as Japanese GDP falls at the fastest pace in five yeas

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.

Real GDP in Japan plunged 6.3% on an annualized basis in Q4 2019. pic.twitter.com/cqB3vbCSC3

Related: UK consumer confidence at highest level since 2009

Related: UK housing boom leads to £2,500 jump in asking 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.

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.

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.

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.

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).

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’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.

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.

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.

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

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.

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....

Related: UK consumer confidence at highest level since 2009

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.

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,.

Deutsche @bundesbank observes economic risks with regard #coronavirus outbreak in China. A temporary decline in overall economic demand is likely to dampen GER export activity. Some global supply chains could be affected by safeguard measures taken https://t.co/JQS9PDMB6T pic.twitter.com/K2bK2K1qO6

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

Related: Cathay Pacific issues profit warning after coronavirus hits service

Here’s some more of today’s business stories - from rising house prices in the UK to a row over General Motors:

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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.

“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.

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

Lots of @cathaypacific headlines from its January stats:
- H1 2020 profit to be "significantly down" on H1 2019 HK$1.35bn profit
- Feb/Mar capacity cuts expanded from 30% to 40%
- April "likely" to see cuts in capacity too

More in @SCMPNews shortly.

So until the coronavirus concerns really broke out towards the last week of January, @cathaypacific had a pretty positive first three weeks of 2020. Higher loads and yields Vs. same time in 2019. Then the virus wiped that out.

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.

Oof. Cathay Pacific reports that inbound passenger traffic to Hong Kong was down 40% in January from last year -- a slight improvement over the 46% declines seen in November and December. On the bright side, outbound traffic was up 1% (but mostly because of earlier CNY).

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

Related: Heathrow delays continue after technical glitches

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

“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.”

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

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.

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.

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.

“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 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.

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.....

FYI, Japan didnt shrink by 6.3% in Q4. It shrank by -1.6%, which would work out at -6.3% if it saw -1.6% growth for 4 quarters (including compounding effect). Some people confusing the annualized and Q4 readings. Its just a way of projecting a full yr of GDP given latest figure

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.

22 OECD countries have reported GDP figures for Q4 2019. Hungary currently out on top (4.6%y/y). US (2.3%y/y) at the top of the 6 G7 countries that have reported, though there's not much competition as the other 5 are among the 7 at the bottom of the table. UK at 1.1%y/y. pic.twitter.com/8MkvvaLu5z

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.

China stocks have bounced back from a sell-off that erased $720 billion https://t.co/lDKJQgVLvi pic.twitter.com/Ycu6zMmC6R

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

“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.

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

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.

Worryingly the huge -6.3% annualized GDP reading for Japan is for Q4. Meaning it is yet to factor in any impact from the #coronavirus.

So that’s the third (Japan) and fourth (Germany) biggest economies in the world flirting with recession coming into 2020.

Serious lack of momentum given what is happening in China. https://t.co/TJ9UzZDOrP pic.twitter.com/okia60rzhE

Huge contraction is #Japan GDP in Q4 after consumption tax hike seems to have outstripped others expectations, although in line with our teams forecast. H1 2020 going to be very soft. Olympics will help a bit in H2 but not as much as some hope.

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.

“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.”

Grim Q4 GDP print for Japan: 6.3% contraction annualised. Tax hike, weather, China showdown to blame. Coronavirus augurs ill for Q1. Even with a recovery in H2, bad end to 2019, poor start to 2020 suggest Japan’s full-yr 2020 GDP will flatline at best, probably shrink. Asahi pic pic.twitter.com/MZbkOkM5sv

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.

Danske Daily - Japanese recession fears mount

Market movers today:
➡️Coronavirus headlines to set the tone in markets on a day US markets are closed and data releases are light

Read morehttps://t.co/HfyWqFqHO8 pic.twitter.com/nDgoOtk8zl

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.

#Japan Q4 GDP Q/Q: -1.6% v 0.1% prior ...first contraction since Q3 2018 and steepest since Q2 2014 pic.twitter.com/2Eb0zf6mgH

Wow! #Japan's economy shrunk by a whopping 6.3% annualized in Q4. Biggest decline in #GDP since Q2 2014 and second-biggest drop since the Great Financial Crisis. pic.twitter.com/4C3nf9JGTK

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.

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