The impact of the epidemic on industrial production may exceed the first quarter

The impact of the epidemic on production activities is one-time and temporary. But how long is this "temporary"? The author believes that its impact may exceed the first quarter, and this possibility needs attention. From the perspective of the first quarter itself, the main impact of the epidemic on economic activities will be reflected in demand shocks in the service industry. The impact on manufacturing is not only reflected in demand shocks, but also in supply shocks.

So why might the economic impact of the outbreak exceed the first quarter?

First, the temporary loss of new orders for export manufacturing may continue to affect the epidemic until the second quarter.

From the data since January 2005, March and April after the Spring Festival each year is the peak period for export orders during the year, and the two are even significantly higher than the third peak Christmas order in September. In March and April, the average of the order index in March was the highest. It can be seen that the performance of export orders in March and April will determine the export performance in the following months.

At present, foreign buyers are paying close attention to the outbreak in China. However, due to the foregoing reasons, the delivery time of the order at the beginning of the year cannot be confirmed at present, and even a certain percentage will be delayed. If there is still uncertainty in the recovery of industrial capacity in March, it may have a certain degree of impact on new orders for the month, which in turn will affect production activities in the subsequent 2 quarters.

Concerns about order loss are different for different companies and industries. For companies with strong international competitiveness, this worry is not obvious. However, for apparel companies, foreign buyers may place orders in multiple countries at the same time. If China's production recovery is delayed, it may affect the direction of foreign buyers' order allocation.

In addition, although the World Health Organization does not recommend measures to restrict travel and trade, some countries have adopted separate restrictions and raised risk levels. This could also have a negative impact on new orders in China. For example, a foreign supplier should consider adding a Chinese company as a supplier, which requires preliminary negotiation, product testing, factory inspection, proofing, negotiation, and contract signing. Many of the above links involve international purchases of foreign buyers from China. At present, the negotiation process of such new Chinese companies as suppliers may be disrupted or even faced with a suspension, which may affect the potential growth of export orders.

Second, the fixed expenditures of industrial enterprises remain unchanged, production difficulties increase, and the pressure on the capital chain is exacerbated.

First of all, during the postponement of resumption of work and the isolation of foreign employees, companies still face fixed expenses such as rent and interest on loans. Second, do companies have to pay wages during the postponed resumption period? Local standards vary, and some of them still pay wages. For example, the "Notice on Delaying the Resumption of Work and School Starts in Shanghai's Enterprises" issued by Shanghai on January 27 clearly states that "for rest employees, enterprises should pay wages according to the standards agreed in the labor contract." Third, for patients with new pneumonia, suspected patients, and close contacts who are unable to provide normal labor due to isolation measures such as isolation treatment, isolation observation, etc., the enterprise should also "deem to provide normal labor and pay employees during normal working hours."

At the same time, we have also noticed that the capital chain of private industrial enterprises has generally been tight. According to the latest data from the National Bureau of Statistics: In November 2019, the amount of bills and accounts receivable of private industrial enterprises reached 5.025 trillion yuan, a year-on-year growth rate of 32.3%, which is the highest year-on-year growth rate since 2007. During the same period, the average payback period of receivables of private industrial enterprises reached 44.6 days, which was somewhat relieved from the peak in 2019, but still at a historical high.

It can be seen that the capital chain of private industrial enterprises was originally in a tense state. Coupled with fixed expenditures, additional labor costs caused by the epidemic, delays in resumption of work, delays in order delivery, and increased protection costs for resumption of production during the epidemic prevention and control period, these difficulties will have a greater impact on companies in trouble. If the capital chain of these companies breaks, it may bring bankruptcy and increase unemployment, which may affect subsequent economic trends. This situation needs attention and a full assessment.