China’s manufacturing Purchasing Manager’s Index (PMI) fell by about 22 points in February

China’s manufacturing Purchasing Manager’s Index (PMI) fell by about 22 points in February

The slowdown of manufacturing in China due to the coronavirus (Covid-19) outbreak could result in a US$50bn drop in global exports, the UN's trade and development agency says.

According to estimates published by UNCTAD, China's manufacturing Purchasing Manager's Index (PMI) – a critical production index – fell by about 22 points to 37.5 in February, the lowest reading since 2004. Such a drop in output implies a 2% reduction in exports on an annual basis.

"Any slowdown in manufacturing in one part of the world will have a ripple effect in economic activity across the globe because of regional and global value chains," says UNCTAD secretary-general Mukhisa Kituyi.

While the spread of the coronavirus is first and foremost a public health emergency, UNCTAD says it is also a significant economic threat.

A preliminary downside scenario sees a $2trn shortfall in global income with a $220bn hit to developing countries (excluding China).

The most badly affected economies in this scenario will be oil-exporting countries, but also other commodity exporters, which stand to lose more than one percentage point of growth, as well as those with strong trade linkages to the initially shocked economies, according to UNCTAD.

The trade and development agency believes the Covid-19 shock will cause a recession in some countries and depress global annual growth this year to below 2.5%, the recessionary threshold for the world economy.

A combination of asset price deflation, weaker aggregate demand, heightened debt distress and a worsening income distribution could all contribute.

"Back in September we were anxiously scanning the horizon for possible shocks given the financial fragilities left unaddressed since the 2008 crisis and the persistent weakness in demand," says Richard Kozul-Wright, UNCTAD's director of globalisation and development strategies. "No one saw this coming – but the bigger story is a decade of debt, delusion and policy drift."

Public and private aggregate debt levels in many developing countries already are at elevated, and in several cases acute, distress levels, says UNCTAD.

"While the recent explosion of corporate debt, much of it of low credit quality, poses the most immediate danger in advanced economies, developing countries face a range of fast-deepening financial and debt vulnerabilities that do not bode well for their ability to withstand another external shock," Kozul-Wright adds.

China also has become a crucial source of longer-term borrowing for developing countries and if its lending conditions tighten with the slowdown, those with strongest financial links to China might be amongst the slowest to recover from the economic impact of the Covid-19 crisis, UNCTAD predicts.

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