By Jameel Ahmad
Drop in consumer spending in China could have negative repercussions for global economy
Another week, another drop in oil price.
The commodity has suffered price weakness for the first three successive full trading weeks of 2020, after the initial burst higher to begin the decade following the US-Iran geopolitical escalation as trading kicked off for the new year.
This time, the oil price has fallen in spite of a bump higher to begin trading for the week on January 20 as concerns swept the market that the uncertainty in Libya-Iraq could disrupt supply of the commodity throughout the region – only to since see WTI Oil lose more than $5 at the time of writing.
As of January 24, WTI Oil had fallen below $54 for the first time since late October 2019.
The lead reason for the sensitivity that is being displayed in oil, as well as global markets, are fears over what impact the virus in China could have on the global economy – as Chinese authorities adopt measures to cancel Chinese New Year festivals and celebrations with new cases of the virus also confirmed in other areas of the world.
The initial fears are that the virus could bring back similar memories to the SARS illness of 2003, although it is still too difficult to pinpoint what the economic impact will be as there is still little known about the coronavirus as it stands.
What we can say is that there are indications that the roots are in place for the outbreak to have a serious impact on consumer sentiment, especially in China where major Chinese New Year festivals have been cancelled.
The illness is also taking place at a seasonal time for retailers to enjoy business as consumers spend. Looking at last year alone, the largest period of activity for consumers was in January and March of 2019 meaning that, in the event that anxiety continues over the unknown elements of the coronavirus, the likely probability that consumer spending will drop in China.
For the first half of 2019, consumer spending accounted for 60 percent of China’s GDP and with the nation seen as such a superpower for the world economy several negative assumptions will in time be put in place for what economic impact this might have globally for the first quarter of 2020.
In the event that coronavirus fears continue into the next trading week (January 27) or if anxiety picks up, investors can monitor for more potential weakness in oil as well as global stock markets as a result of traders becoming more risk averse with this meaning demand for the USD and Japanese Yen can hypothetically accelerate as a result of demand picking up for safe haven assets.
Jameel Ahmad, global head of currency strategy and market research at FXTM