Things are looking good for China’s manufacturing output – but don’t get too excited, the economy may still struggle

The switch from euphoria to despair has been astonishingly swift and we should be suspicious of anyone who expects confidence to come back fast, writes Hamish McRae

A worker disinfects machines at a factory in Lianyungang in China's eastern Jiangsu province (AFP)

Is the turning point in sight? We all desperately want it to be, but rationally it is not. Cases and deaths in Europe and America will continue to rise for some weeks yet, and even when they start to fall, it will take a long time for the economic damage to be repaired. In human terms, sadly, there is damage that can never be repaired.

Yet financial markets sense that something is happening. You can see that shares have recovered from the despair of 10 days ago. Over the weekend, JP Morgan put out a note saying that it thought the market had hit bottom. Earlier this month, filings showed that Warren Buffett had increased Berkshire Hathaway’s holdings of a number of stocks, including Delta Airlines. Seeing as he was extremely cautious in the run-up to the crisis, building up a $126bn (£100bn) cash pile, and has been through half a dozen or so serious bear markets, this is another signal of a turning point.

But that is just opinion. What about fact?

Well, there is one set of numbers that have just come out: the forward indicator for manufacturing output in China. The purchasing manager index for March rose to 52, more than expected, suggesting that Chinese factories had increased production this month. Any PMI number above 50 shows expansion, any below contraction – the equivalent February figure was a record low of 35.7.

Before anyone gets excited about this, note that if you start from utter despair, anything that is a bit less awful will look good. Note too that Chinese data is not wholly reliable. But this is the first evidence that China might experience a V-shaped recession. It was first in, so you would expect it to be first out. But that says nothing as to whether the climb out is halting and protracted or reasonably brisk. Now there are signals that it might be swift. It would follow that if China can do it, others can too. Yet, to put so much emphasis on one number from China would be absurd.

Equity markets typically turn up about three months before economies turn up; insofar as they have predictive capacity, a sustained rally now would give cause for hope. Share prices are recognised as a lead indicator, albeit an imperfect and incoherent one. They did not give any advance warning of this economic crash – the S&P 500 index was still at its all-time highs in late February, when it was clear that, in China at least, an economic disaster was unfolding. The switch from euphoria to despair has been astonishingly swift and we should be suspicious of anyone who expects confidence to come back fast. There is much more bad economic news to come.

What we have now, though, is a framework to think about the recovery. We know that some more weak companies will go bust. Carluccio’s, for example, had been struggling for some time before it called in the administrators on Monday. Some airlines are not going to make it, certainly not without state aid. We should all fear, too, for smaller businesses, the self-employed, and people in insecure jobs. Wealth has been destroyed and everything takes time to recover.

We also know that some sectors will do very well. Pharmaceuticals in the developed world will boom. Their importance to society has been underlined, and we will want them to bring production of drugs back from the emerging world. Cost will matter less; security of supply will matter more. Expect too that the huge effort being put into finding a vaccine for Covid-19 will result in other discoveries and therapies. If you are hunting for silver linings, improved global health care will be one.

We have also to acknowledge what we cannot know. For example, we don’t know what permanent changes there will be to spending patterns. Will people be as eager as before to go on foreign holidays? Or cruises? Will, on the other hand, people want to invest more in their homes, now that homes have become places of work? Are there wider social changes that we can barely envisage?

The trick, peering ahead through the fog, is to identify what we reasonably do know, what we can make a guess at, and what we absolutely cannot know. The new bit of information from China confirms something that we pretty much did know – that eventually, economies do recover – so it’s useful. But don’t go overboard with the optimism just yet.