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Virus Prompts Pictet To Cut Chinese GDP Forecast

Editorial Staff, 7 February 2020

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Perhaps unsurprisingly, the Geneva-based firm has reduced its forecast on the Asian giant as the virus outbreak and its disruptive impact continues to spread. Ironically, the problem has arisen at a time when some commentators hoped US-China trade tensions would ease this year.

Pictet Wealth Management has cut its forecast on Chinese gross domestic product growth this year because of the coronavirus outbreak that has halted flights and disrupted other transport and supply routes around the world.

The Swiss firm said it has downgraded its 2020 GDP forecast to 5.6 per cent from its previous 5.9 per cent forecast. It expects most of the slowdown to register in the first three months of this year.

Recent commentaries from wealth managers across the world appear to coalesce around the view that the virus outbreak, originating in the Wuhan region of China, is going to be more serious and disruptive than the 2003 SARS episode.

"Our base-case scenario (60 per cent probability) is that Chinese GDP growth in Q1 may slow to 4.0-4.5 per cent compared to our previous forecast of 6.0 per cent," Dong Chen, senior Asia economist at Pictet Wealth Management, said in a note yesterday. "In our base-case scenario, we expect growth to start to rebound in Q2 as the virus comes under control in most parts of the country and government policy stimulus kicks in."

On a more upbeat note, Chen said that the "exogenous" shock from the virus does not change China's underlying growth trend.

"The services sector, which has accounted for about 60 per cent of Chinese growth in recent years, will be the most heavily hit - especially tourism, restaurants and hotels, entertainment, retail sales, logistics and so on. Industrial production and fixed-asset investment will also be affected by the extension of the Chinese New Year holidays and by interruptions in supply chains," Chen said.

The economist said Pictet predicts that the Chinese central bank will cut interest rates on its medium-term lending facility operations in the near term by roughly the same magnitude and to guide the benchmark lending rate (the loan prime rate, LPR) lower. In addition, the PBoC has more room to cut banks’ required reserve ratios, it said.

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