Coronavirus may sideswipe Chile, Peru and Brazil economies, leave Mexico unscathed By Reuters


Coronavirus may sideswipe Chile, Peru and Brazil economies, leave Mexico unscathed

By Jamie McGeever

BRASILIA (Reuters) – The coronavirus outbreak in China may be altering the 2020 investment outlook for Latin America, souring sentiment toward regional free market beacons Chile and Brazil, while turning heads – and cash – toward left-leaning Mexico.

The consensus among economists is that while the overall impact on Latin American growth and financial markets from the outbreak will be limited, there may be wide divergences across the region.

Chile’s heavy reliance on the export of commodities, especially , make it particularly vulnerable to weaker demand from China, its main trading partner and the world’s largest buyer of commodities.

It is a similar situation for Peru and Brazil – a leading iron ore producer – where almost a third of all exports go to China. In the case of Brazil, growth forecasts were already being reduced and the currency was sliding to all-time lows against the dollar before the global ripple effects of the coronavirus began.

“The most exposed economies are Chile, Peru, and to some extent Brazil,” said Alberto Ramos, head of Latin American research at Goldman Sachs (NYSE:). “The key source of downside risk to LatAm is a deterioration of the terms of trade triggered by deep long-lasting impact of a China slowdown on commodity prices.”

Much will depend on how long the outbreak of the fast-spreading virus that emerged in late December in central China and has killed more 2,100 people lasts, as the world’s second largest economy struggles to get back on track.

Meanwhile investors see Mexico, whose economy contracted last year for the first time in a decade under leftist President Andres Manuel Lopez Obrador, as far less exposed to China, either via direct trade links or from falling commodities prices globally.

There has not been a single confirmed case anywhere in Latin America of the new coronavirus that has spread to some two dozen countries, but investors in the region are getting worried.

Bank of America (NYSE:) Merrill Lynch’s (BAML) latest monthly survey of Latin American fund managers showed that 56% say slowing growth and commodities demand in China is the biggest risk to the region.

Bullishness on Brazil is fading, with 37% of those polled by BAML forecasting the stock market above 130,000 points by the end of the year, compared with 56% last month.

The survey of 52 fund managers with about $103 billion of assets under management also showed that 27% of respondents say the economic situation in Chile will deteriorate over the next six months. In January, that was 7%.

Chile has long been the regional poster-child for free-market economic reforms. But even before the coronavirus outbreak, its status as investors’ darling had been threatened by protests that blamed those policies for widespread inequality.

By contrast, 21% reckon the Mexican peso will outperform over the next six months, up from 4% in January. So far this year, the peso is up 0.6% against the U.S. dollar while Brazil’s real has slumped nearly 9%.

Economists and strategists at Citi have constructed a coronavirus “vulnerability index” modeled on four variables: economic growth, supply chains, commodities, and “external” market volatility risks.

Chile, Ecuador and Peru are seen as by far the most vulnerable countries, with index scores of 100, 98 and 97, respectively. Next are Brazil (66) and Colombia (63), while Mexico is second bottom of the table with a score of 27.

“After a dismal 2019, prospects for the region are favorable, but weak, as accelerating growth is predicated on sentiment improving for investment and consumption,” Citi said in a research note.

“A protracted outbreak will bring another round of growth downgrades.”

So far, Brazil is the only country whose 2020 growth forecasts have been cut by the bank’s economists.

Graphic: Latam impact from coronavirus – Goldman – https://fingfx.thomsonreuters.com/gfx/mkt/13/2334/2302/GSCHART1.png

Ramos and his Goldman colleagues calculate that a 10% drop in commodity prices would knock 1.3 percentage points off Peru’s gross domestic product and a similar amount off Chile’s GDP, while a 10% decline in export volumes to China would knock 0.34 of a percentage point off Brazil’s GDP.

For Mexico, a 10% decline in exports to China would knock just 0.05 of a percentage point off GDP, they estimate, noting that most Latin American currencies and stocks have fallen this year, with the notable exceptions being Mexico’s peso and BMV stock market, which is up 2.7% year to date.



UK retail sales rebound in January after weak end to 2019 By Reuters



LONDON, Feb 20 (Reuters) – British shoppers started spending again at the start of this year after a very sluggish end to 2019, adding to signs that improved sentiment since December’s election is translating into stronger economic activity.

Retail sales volumes rose 0.9% on the month in January on a seasonally adjusted basis, after a 0.5% fall in December, Britain’s Office for National Statistics said on Thursday.

This was the biggest rise since March and a stronger turnaround than the 0.7% month-on-month growth predicted on average by economists in a Reuters poll.

The bounce back was even more marked if fuel sales are excluded, with sales up 1.6% on the month, the biggest increase since May 2018 and above all forecasts in the Reuters poll.

Consumer demand faltered in the latter part of 2019 against a backdrop of political deadlock in parliament over Brexit.

This culminated in a snap election in December that returned Prime Minister Boris Johnson to office with a comfortable majority. Business and consumer sentiment has improved since then, as Britain left the EU on Jan. 31 with an 11-month transition deal.

Sales at petrol stations fell by 5.7% in January, the largest since April 2012, which the ONS linked to higher fuel prices, while clothing sales grew by the most since May 2018 after several months of weakness.

Annual sales growth remains lacklustre, however, up just 0.8% on the year after 0.9% annual growth in December, broadly in line with economists’ forecasts.

Excluding fuel, sales did not grow at all over the period from August to December, the weakest such run since comparable records began in 1996.

Earlier in 2019 consumer demand had been robust, helping support growth at a time when businesses had put investment on hold until there was more clarity over Brexit.

Britain has now left the European Union, and an 11-month transition deal expires at the end of the year, after which there will be customs checks and potentially tariffs on trade with the EU, as well as curbs on immigration.

January figures from the British Retail Consortium showed a slowdown in spending to 0.4% from 1.9% growth in December.

Asda, the British supermarket arm of the world’s biggest retailer Walmart (N:), said on Tuesday that increasingly budget-conscious consumers were behind a fall in underlying sales in the key Christmas quarter.

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UK employers offer lowest pay awards since Dec 2018: XpertHR By Reuters



LONDON (Reuters) – British employers offered staff the lowest annual pay awards in more than a year during the three months to January, adding to signs that a slower economy may be hurting wages even as unemployment holds at its lowest since 1975.

The median annual pay rise offered to staff in the three months to January fell to 2.1% from 2.2% in the final quarter of 2019, its lowest since the last three months of 2018, human resources data provider XpertHR said.

“With January generally setting the tone for much of the rest of the year, we now expect employers to continue to exercise caution when making their pay awards, and for low pay awards to prevail over the coming months,” XpertHR analyst Sheila Attwood said.

Pay settlements from large employers sometimes show where official wage data is headed, though the former typically grow more slowly as they do not include pay rises from promotions and job changes.

Britain’s official rate of wage growth peaked at 4.0% in the three months to June 2019, but slowed to 2.9% in the final quarter of last year.

Job creation was strong over the period, but the economy as a whole stagnated.

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Fed in No Hurry to Move from Sidelines, Minutes Show By Investing.com


© Reuters.

By Yasin Ebrahim

Investing.com – Federal Reserve policymakers agreed that current stance on monetary policy was likely to remain appropriate “for a time” to sustain economic growth and support the pace of inflation, which continues to fall short of the central bank’s target.

of the Fed’s Jan. 28-29 policy meeting, released on Wednesday, showed there was a firm consensus among members to keep rates on hold until there was a significant change to the U.S. economic outlook.

Fed policymakers said they expected economic growth to continue at a moderate pace in the wake of easing trade uncertainties and signs of stabilization in global growth, according to the minutes. The outbreak of the coronavirus was flagged as a new risk to the global growth outlook, which Fed members said warranted close watching at present, suggesting that the current pace of policy remains appropriate.

“Participants generally judged that the current stance of monetary policy was appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective,” the minutes showed. “(T)here were some signs of stabilization in global growth, though uncertainties about the outlook remained, including those posed by the outbreak of the coronavirus.”

In recent weeks, worries about the coronavirus’ impact on global growth had sparked some hope the Fed could deliver a rate cut sooner rather than later.

But Chairman Jay Powell, earlier this month, quashed those hopes somewhat, saying it was “too early” to determine the economic impact from the virus.

“We know that there will be some — very likely be some — effects on the United States (from the coronavirus fallout),” Powell said. “I think it’s just too early to say. We have to resist the temptation to speculate on this.”

Still, investors continue to bet on a quarter-point rate cut in second half of the year, which is at odds with the Fed’s dot plot released in December, showing that policymakers expect rates to remain on hold this year.

Traders see a 70% chance of a quarter-point cut by September, according to Investing.com’s Fed Funds Rate tracker.

In recent weeks, policymakers have continued to back the central bank’s wait and see approach.

“It is my view that, based on my base-case outlook for the U.S. economy, the current setting of the federal funds rate at 1.5 to 1.75 percent is roughly appropriate,” Dallas Fed President Robert Kaplan wrote in an essay released Tuesday morning.

Data since the last meeting appears to support the Fed’s case to keep rates steady.

January’s employment report showed the economy generated a better-than-expected 225,000 new jobs last month, while the pace of inflation at 1.6%, continued to lag the Fed’s 2% target.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

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U.K. Inflation Accelerates to Its Fastest Pace in Six Months By Bloomberg



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U.K. inflation picked up for the first time in six months, boosted by the cost of energy, motor fuel and air fares.

Consumer prices rose a stronger-than-forecast 1.8% in January from a year earlier, the fastest since July, the Office for National Statistics said Wednesday. Core inflation picked up to 1.6%. The pound erased a modest decline and was up 0.1% to $1.3014 as of 9:35 a.m. London time.

But the acceleration is likely to prove temporary, with inflation expected to fall back in the second quarter and remain below the Bank of England’s 2% target for the next two years.

The benign inflation outlook would make it easier for the BOE to cut interest rates should the economy wobble amid critical trade talks with the European Union, though policy makers are expected to refrain for now. That’s because the labor market remains tight and confidence has improved since Prime Minister Boris Johnson’s election victory in December.

January’s inflation boost from gas and electricity was largely due to a sharp drop a year earlier when the industry regulator introduced its price cap. There was also upward pressure from auto fuel, which rose almost 2%, while air fares fell less than a year ago.

Other figures showed pipeline pressures remained relatively subdued, with output prices rising just 1.1% year-on-year.House prices rose an annual 2.2% in December, their strongest increase in more than a year, and surveys suggest the post-election revival in the housing market gathered pace in January. Prices in London, which have borne the brunt of Brexit uncertainty, posted the fastest growth since October 2017.

(Updates with pound in second paragraph)

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Asian shares nudge up as virus spread slows, euro fragile By Reuters


© Reuters. An investor looks at his mobile phone in front of a board showing stock information at a brokerage office in Beijing

By Stanley White

TOKYO (Reuters) – Asian shares and U.S. stock futures edged cautiously higher on Wednesday, as investors tried to shake off worries about the coronavirus epidemic after a slight decline in the number of new cases.

MSCI’s broadest index of Asia-Pacific shares outside Japan eked out a minor 0.03% gain but spent much of the morning session bouncing between gains and losses.

Chinese shares erased early declines to trade 0.15% higher. Australian shares were up 0.02%, while Japan’s stock index rose 0.5%.

The euro languished at a three-year low versus the dollar as disappointing data from Germany, Europe’s largest economy, has stoked fears that the euro zone is more vulnerable to external shocks than previously thought.

The Treasury curve remained inverted on Wednesday as yields on three-month bills traded above yields on 10-year notes in a sign that some investors remain cautious about the outlook.

China, the world’s second-largest economy, is still struggling to get its manufacturing sector back online after imposing severe travel restrictions to contain a virus that emerged in the central Chinese province of Hubei late last year.

Many investors view Chinese data on the virus, dubbed SARS-CoV-2, with a great deal of scepticism, but there are hopes that officials will roll out more stimulus to support the world’s second-largest economy.

“Part of the thinking that is supporting markets is the actions that China takes to support its economy,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney. “Any investor concern around impact on demand globally from the virus will be offset by expectations that global central banks will ride to the rescue.”

U.S. stock futures rose 0.18% in Asia on Wednesday. The fell 0.29% on Tuesday after Apple Inc (NASDAQ:) said it would miss sales targets because the virus in China is pressuring its supply chain.

Mainland China had 1,749 new confirmed cases of coronavirus infections on Tuesday, the country’s National Health Commission said on Wednesday, down from 1,886 cases a day earlier and the lowest since Jan. 29.

The death toll in China has topped more than 2,000 from the flu-like illness which has already spread to 24 other countries.

The People’s Bank of China cut the interest rate on its medium-term lending on Monday, which is expected to pave the way for a reduction in the country’s benchmark loan prime rate on Thursday, as policymakers try to ease financial strains caused by the virus.

In the currency market, the euro was quoted at $1.0804. The common currency managed to reclaim the closely-watched $1.08 level which it broke through on Wednesday but was still close to its lowest since April 2017.

Sentiment remained weak after a survey showed a sharp deterioration in German investor sentiment due to the coronavirus.

In the onshore market, the yuan briefly fell to a two-week low of 7.0136 per dollar as traders continued to ponder the economic impact of the virus and the chance for more monetary easing.

The yield on three-month Treasury bills stood at 1.5770% in Asia on Wednesday, above the of 1.5610%.

A yield curve inverts when short-term yields trade above long-term yields and is often considered a sign of recession in the next year or two.

rose 0.21% to $52.16 a barrel, while rose 0.12% to $57.87 per barrel as a reduction in supply from Libya offset concerns about weaker Chinese demand for commodities.

Expectations that the Organization of the Petroleum Exporting Countries (OPEC) and allied producers including Russia will cut output further should lend support to prices.

The group, known as OPEC+, will meet in Vienna on March 6.



French farmers sweat over subsidies in post-Brexit EU budget talks By Reuters



By Lucien Libert and Charles Platiau

LIZINES, France (Reuters) – French dairy and crop farmer Jean-Claude Pette relies on European Union subsidies to keep his 200-hectare farm afloat. But he worries support could be cut as governments seek ways to plug a budget hole left by Britain’s departure from the bloc.

Pette receives 58,000 euros in subsidies annually, more than the 45,000 euro income he earns from his 100 dairy cows and fields of cereals and sugar beet.

He said President Emmanuel Macron must insist on those payouts being left untouched when EU leaders meet this week to thrash out the bloc’s next seven-year budget.

“Unfortunately, if you look at the prices we sell our produce for today, we need those subsidies to survive,” Pette told Reuters on his farm 80km (50 miles) outside Paris.

Pette is far from alone in France, the EU’s biggest agriculture producer.

Agriculture contributed just 1.1% to EU gross domestic product while the bloc’s Common Agricultural Policy (CAP) is the single largest component of EU spending, accounting for 38% of the 1.1 trillion euro 2014-20 budget.

EU leaders are divided ahead of the Feb. 20 summit over the size of the overall budget and spending priorities as climate change, defense and immigration jostle with more traditional needs such as farmers and infrastructure projects.

France says there can be no reduction to the CAP budget. Sweden’s EU Minister Hans Dahlgren told Reuters a European Commission proposal for a 5% cut did not go far enough.

TOUGH TALKS

French Farmers are already unhappy with Macron, a former investment banker, over issues like pesticide restrictions and a landmark free trade deal brokered with South American countries.

Meanwhile, legislation aimed at sharing profits more fairly along the food chain has yet to be felt at the farmgate.

Macron’s government says it has heard the farmers’ demands.

“For us, a drop in the agricultural budget is not an option,” a French diplomat said, adding that France had the support of other farming nations.

Macron’s need to appease the powerful farming lobby at home sets him on a collision course with others like Sweden who want more spending emphasis on climate change, security and migration.

Dahlgren said that meant cuts were needed to spending on agriculture and structural cohesion (infrastructure) and that his government’s stance was closely aligned to Austria, Denmark and the Netherlands.

“Some people call us the ‘frugal four’. I’d prefer to call us the tax payers’ best friend,” the minister said.

Beyond the size of the CAP budget, EU countries have options to reshuffle spending, including capping payments to larger farms, harmonizing subsidies between newer and older EU states, and giving more leeway to each country to allocate CAP funds.

Making the CAP more environment-focused might be the reform path that wins most consensus, but this could be tough for Macron to sell to farmers already exasperated at being cast as polluters.

Pette, who joined hundreds of French farmers in November blocking highways leading into Paris, said a further greening of the CAP would devalue subsidies.

“If we’re faced with environmental and society demands that are unattainable economically, the fact we receive aid payments won’t be enough to offset our losses,” he said.



Saudi inflation up in January for second consecutive month By Reuters



DUBAI (Reuters) – Saudi Arabia’s consumer price index rose 0.4% in January from a year earlier, official data showed on Tuesday, the second consecutive month of positive inflation after it was in negative territory for most of last year.

Hikes in prices at restaurants and hotels, education, and healthcare, boosted the index, data from the General Authority for Statistics showed.

Prices for food and beverages, which account for nearly 20% of the index basket, rose 2.2%, while prices for housing and utilities, which account for around 25% of the basket, decreased 3.3% – a lower deflationary pace than in previous months.

“This appears to reflect the recent bottoming out in the property market, which is feeding through into rents declining at a slower pace,” Jason Tuvey, senior emerging markets economist at Capital Economics said in a note.

Prices receded in Saudi Arabia last year after rising in 2018 on the back of the introduction of a value added tax.

But higher government spending and an easing of austerity measures have given a boost to economic activity, which has recently started to translate into positive inflation, economists have said.

Saudi Arabia remains dominated by hydrocarbon revenues despite Crown Prince Mohammed bin Salman’s plans to diversify it. The economy grew a mere 0.4% last year, according to government forecasts, mainly because of a slowdown in its oil sector.

Tuvey said headline inflation could rise this year after Saudi oil giant Aramco (SE:) increased gasoline prices this month.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Coronavirus could be knockout blow for Hong Kong’s once-thriving tourism, retail sectors By Reuters



By Sarah Wu and Donny Kwok

HONG KONG (Reuters) – Tom Bennell’s olive oil distribution business took a heavy beating during months of pro-democracy protests that emptied Hong Kong hotels and restaurants, his major customers. Now he fears a knockout blow as the city fights the coronavirus.

The two-decade-old Olives and Oils supplies more than 20 five-star hotels, as well as clubs, delis and restaurants in Chinese-ruled Hong Kong, where retail and tourism act like balance wheels for an economy running on trade and finance.

The coronavirus, which has killed more than 1,700 people across the border in mainland China and one of 60 patients in Hong Kong, has reduced tourist arrivals to a trickle and kept residents away from shops at a time when the city is mired in its first recession in a decade.

Business is so bad that Bennell has pulled his two teenage sons out of international school to cut costs. If things don’t turn around, he might be forced to leave the city that has been home since 1993.

“This is the straw that’s going to break the camel’s back. It’s horrific,” said the 46-year-old. “This is the worst I’ve ever seen it. It’s unbelievable.”

Hong Kong retail sales have been in free-fall for a year as the economy contracted for three consecutive quarters, dropping 19.4% in December as protesters, angry with Beijing’s perceived tightening grip over the city, clashed with police in shopping malls.

Communist Party rulers in Beijing deny meddling with the former British colony’s freedoms, guaranteed when it returned to Chinese rule in 1997.

Retail sales are expected to post their steepest fall on record in January at around 30%. Tourist arrivals in Hong Kong in February fell to under 3,000 a day on average, from around 100,000 in January, which was already less than half the traffic from January 2019.

(Graphic – Hong Kong retail sales, tourism, GDP: https://fingfx.thomsonreuters.com/gfx/mkt/13/2113/2081/Hong%20Kong%20retail%20sales,%20tourism,%20GDP.jpg)

‘SUPER-COLD WINTER’

The Hong Kong Federation of Restaurants and Related Trades said more than 100 restaurants had closed.

Kwok Wang-hing, who works as a cook at a dim sum restaurant and chairs the Eating Establishment Employees’ General Union, said the restaurant business had dropped 30-50% during the protests, but the coronavirus had raised that to 70-80%.

“It’s quite depressing. People in the industry … keep wondering when they’ll lose their jobs,” Kwok said.

The Travel Industry Council of Hong Kong said a wave of closures of travel agents and related businesses had put more than 40,000 jobs at risk.

“We are very worried and not sure how long we can hold on without any business,” council executive director Alice Chan told Reuters.

The Hong Kong Retail Management Association said it had entered “a super-cold winter” threatening its survival. The first 10 days of the Lunar New Year, the biggest holiday of the year, saw business falling 30-50% on average from last year’s equivalent period, with sales of jewellery, watches, cosmetics and clothing plunging as much as 80%.

Restaurant chain LH Group Limited (HK:) said it had temporarily closed all its On-Yasai and Mou Mou Club restaurants from Feb 13. Chow Tai Fook Jewellery (HK:), the city’s $11 billion purveyor of precious gems and watches, temporarily closed 40 points of sale in Hong Kong and neighboring Macau, with the rest operating shorter hours.

Cosmetics chain Sa Sa International (HK:) has closed some stores and said it will trim its Hong Kong workforce by up to 3% and cut salaries by 10-40% between March and May, aiming to cut costs by a third.

Unemployment, now at 3.3%, is expected to pick up sharply this year.

(Graphic – Hong Kong unemployment: https://fingfx.thomsonreuters.com/gfx/mkt/13/2112/2080/Hong%20Kong%20unemployment.png)

Owen Kwok, head of the Retail Frontline Union, said 800 of its 3,000 members had been asked to take unpaid leave.

Cat Hou, 28, chairwoman of the Bartender & Mixologists Union, lost her own job at a central cocktail lounge. The owner said either she or the manager had to be laid off and she decided to take the plunge.

She said the lounge survived last year with “after-protest people” turning up after police cleared the crowds from the streets.

“There is no one at all now,” Hou said.

Cheung Kwok-tsing, 61, used to work two weeks a month at restaurants and venues owned by the Peninsula Group and he could earn up to HK$800 ($100) a day. His income helped pay his HK$1,900 ($245) rent for four square meters in a subdivided flat and barely covered living expenses.

Those restaurants were only open for two days in February.

“Even if I don’t have enough to pay for food, there’s nothing I can do,” Cheung said. “Sometimes… I just eat a few slices of bread.”



Japan Recession Fears Grow on Virus Hit After Tax-Hike Blow By Bloomberg



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Japan’s economy lurched toward a possible recession after taking another battering from a sales-tax hike in the last quarter that left it at a low ebb as the coronavirus outbreak hit activity at the start of 2020.

Japan’s gross domestic product shrank at an annualized pace of 6.3% from the previous quarter in the three months through December, the biggest slide since a previous tax increase in 2014, according to a preliminary estimate by the Cabinet Office Monday.

Economists surveyed had predicted a fall of 3.8%, flagging the adverse impact of the tax hike, weak global demand and typhoon disruption. The far worse-than-expected outcome showed that some of the government confidence in measures to cushion the blow of the tax hike was misplaced.

The result also raises the possibility that with the virus outbreak still spreading, Prime Minister Shinzo Abe may have to consider another round of extra spending to support growth, little more than two months after his most recent stimulus package.

“I’m getting ready for another contraction in Japan’s first quarter. There just aren’t any positive factors to build a positive growth forecast,” said Mari Iwashita, chief market economist at Daiwa Securities Co., flagging her view that the economy is likely falling into recession.

Iwashita expects the government to form another extra budget once it becomes clear the economy has stayed in a funk in the first quarter.

Japan Needs Fiscal Aid, not BOJ Help if Virus Hits Hard: Hamada

The Abe administration and the Bank of Japan had expected a smaller impact from the tax hike compared with the experience in 2014, when it buckled the economy by more than 7%. The tax increase this time was smaller, foods were exempted and the government deployed a raft of counter measures aimed at smoothing out fluctuations in demand.

But economists said some of the government steps, such as rebates on spending via cashless transactions, had limited impact as they didn’t appeal to an older segment of the population not used to mobile phone payment platforms. The figures laid bare the vulnerability of domestic consumption to sales tax hikes, according to Takashi Shiono, an economist at Credit Suisse (SIX:) Group AG.

The latest data showed private consumption plunged by an annualized 11% in the quarter, as households slashed their purchases of cars, cosmetics and domestic appliances. In 2014 the hit was 18%.

Businesses also scaled back investment by 14%, preferring to wait for signs of a recovery from the tax shock before committing to further spending.

While the initial trade deal between the U.S. and China should have offered a tail wind for investment this quarter, the unexpected virus outbreak may instead amplify caution in the boardrooms of Japan Inc.

“Concern over the virus is only intensifying and the mood of self-restraint is going to spread more broadly. I’m becoming downbeat on Japan’s economy,” Shiono said.

The virus has already stopped the visits of hundreds of thousands of Chinese tourists to Japan at the beginning of Japan’s Olympic year, hitting an important source of spending revenue. The longer the outbreak disrupts production and domestic demand in Japan’s biggest trading partner, the more likely Japan’s exporters will suffer and parts supplies may dry up.

Japan Recession Risks Prompt Forecasts of 2020 Contraction

Government officials stuck to their line that the tax impact on the economy was smaller this time than in 2014, but hinted that more spending could be in the pipeline if a slump looked certain.

“We will keep paying careful attention to the virus’s effect on tourism and the wider economy,” said economy minister Yasutoshi Nishimura in a statement. “According to the level of emergency, we will take necessary steps as needed in a flexible manner, and respond fully.”

Abe unveiled initial measures to counter the impact of the coronavirus last week, but so soon after releasing his economic package in December, he is likely to want to see harder evidence of a recession before mulling another large spending spree. Speaking in parliament on Monday he said the government would keep a close watch on the economic mpact of the sales tax and the virus.

While the BOJ has flagged its concern over the virus, it is also likely to emphasize the need for more data to assess the underlying trend. Given the growing side effects of its massive easing program and the relative stability of Japan’s currency, economists see additional action by the bank in the near future as unlikely.

What Bloomberg’s Economist Says

“Given the mounting risks to a rebound this quarter from the coronavirus, the government is likely to face growing pressure to add to already-hefty fiscal stimulus in the pipeline. A sharp drop in nominal GDP won’t sit easy with the Bank of Japan.”

–Yuki Masujima, economist

Click here to read more.

(Adds comment from Prime Minister Shinzo Abe in parliament.)