Waiting for the contagion

Other than a lengthening of supplier delivery times in February, there is little evidence that the shutdown in the Chinese economy has had much impact on the euro-zone economy so far. Indeed, business surveys generally point to a slight pick-up in activity early this year. However, we think that this is about to change. The surge in confirmed Covid-19 cases over the past two weeks means that an epidemic now looks inevitable. This will result in sharp reductions in household spending as consumers avoid crowded shopping malls, international travel and cinemas. In addition, self-isolation will leave some firms short of employees. We expect the deteriorating outlook to prompt the ECB to provide more liquidity support and cut its deposit rate by 10bp next week.