Chinese workers head home, as factories and businesses close

Now Comes the Panic, As Chinese Economy Falls in Deep Contraction

Posted Saturday, February 29, 2020 by
Skerdian Meta • 2 min read

China and the rest of the globe for that matter, is taking hits one after another. The global financial crisis hit everyone hard in 2008 and the economic recession that came in the following years was the worst since 1930s. Central banks threw the kitchen sink at the economy, as they kept cutting interest rates and started quantitative easing (QE) programmes to help the economy.

Eventually, the global economy improved and many major central banks retreated form the expanding monetary policy. Although, that had a negative impact on the global economy, since markets and everything else got too used to central banks pumping cash as life support. Besides that, the trade war between US and China hurt the global economy further and last year we saw different sectors in many major countries fall into recession, such as manufacturing in China and Europe.

Central banks got scared and they started pumping money on the economy again. In Q4 of last year, the global economy started to improve again as a result. Manufacturing came out of contraction in China and the US. But, no rest for the wicked, is there?

The coronavirus outbreak is hitting the Chinese economy hard and it will also hit the global economy, as the virus spreads outside of China. The Chinese manufacturing sector fell in recession in May, but it came out of it in November. Although, after the outbreak of coronavirus, the Chinese government closed parts of the country and today’s data shows that the Chinese economy has dived deep in contraction.

The manufacturing PMI indicator fell to 35.7 points, while non-manufacturing PMI dived to 29.6 points. This is the deepest contraction ever recorded for this indicator, in any country I think. I have been in this business for a decade and a half now, but I have never seen this indicator so low, even during the big crisis of 2-008-2009. New infected cases in China are declining, but the country will remain in lock-down and contraction will continue for a few months at least.

This will weaken the global economy, since China is connected to all places of the Earth. But that’s not the worst; the virus is spreading fast in Europe and other countries and we have seen lock-down in certain areas in Italy. If the virus spreads further, the lock-down will expand further in Italy and Europe. That will hurt the economy further.

Central banks are getting ready to resume easing the monetary policy again, with the Bank of Canada expected to take the first step on Wednesday. But, if people stay inside to isolate themselves until the virus goes, I don’t know how the monetary policy will work. So, here is another shock for the global economy, as China falls in deep contraction and other countries are expected to follow suit.


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