Deep short-term pain, followed by strong recovery

The short-term economic shock from fighting the COVID-19 pandemic has been more serious than initially thought. Most countries have plunged into negative growth during the height of the virus. But recently released forecasts by the Asian Development Bank, the World Bank and others predict that the bounce back from the economic closures can be fast and that growth rates will be strong in the second half of 2020 and into 2021.

ADB report forecast

An ADB report this month forecasts Asian regional growth of 2.2 percent in 2020, a downward revision of 3.3 percentage points relative to the 5.5 percent that ADB had forecast in September 2019. Similarly, the World Bank forecast this month predicts that developing East Asian and the Pacific regional growth will be 2.1 percent in 2020, with a worst case of minus 0.5 percent.

The ADB predicts that China’s sharp contraction in the first quarter will pull down growth to 2.3 percent this year, but the nation will recover some of the losses by rebounding to 7.3 percent in 2021. Last week, the International Monetary Fund forecasted 1.2 percent growth for China and zero growth for Asia in 2020.

The predictions for Asia are significantly higher than for other major economies. For instance, the ADB forecasts that the US will grow just 0.4 percent in 2020, with the Euro area actually declining 1.0 percent. And, the IMF is now predicting that 170 countries will have negative economic growth in 2020, advanced countries will fall 6.1 percent and global GDP will fall 3 percent.

Signs of recovery

Full first-quarter data, released on Friday by the NBS, showed that GDP fell 6.8 percent year-on-year. Retail sales fell 19 percent and fixed asset investment fell 16.1 percent. But value-added industrial output in March fell less steeply than in January and February and the urban unemployment rate stabilized at 5.9 percent. So, we are seeing signs of recovery as the virus-fighting lockdown is eased.

Negative Q1 numbers will pull down the yearly average even if later quarters have strong growth. So, the very low annual growth rates are just arithmetic artifacts of the very negative growth during the period when the fight against the virus was strongest.

The drop in output in recent months has been very fast, the most rapid on record. But forecasters are predicting that recovery will also be rapid, assuming that nations implement stimulative policies, support for recovering business, and international cooperation.

The world still faces huge uncertainties

All this is relatively good news, but relief should be tempered by the realization that the world still faces huge uncertainties. We don’t know when or even if, there will be a vaccine or treatment for the virus, so more quarantines and closures might be necessary. There may also be financial frailties in the system that could lead to an unexpectedly severe financial crisis. And, a lack of international cooperation could make it harder than expected to restore industry and international supply chains.

Since China is moving to recovery ahead of other countries, its sequence of monetary and fiscal policies will serve as a global model. And, many multinational companies are using their China divisions as models for quarantine and opening-up around the world. For example, the Wall Street Journal reports that Starbucks, Disney and the property management firm Cushman & Wakefield are basing their recovery plans around the world on their experience in China.

The recovery also depends now on the global economy

The speed of the recovery in China and throughout the world depends greatly on coordinated international policies.

Peschel of the ADB said with respect to the Chinese economy:” We expect a recovery but the recovery also depends now on the global economy. Now the rest of the world is coping with the pandemic situation and has lockdowns. This, of course, will hit global trade and supply chains－it is kind of a delayed effect. Most likely we will also see Q2 affected. Then, in the second half, we’ll see a return to more normal growth, although these are still big uncertainties because we don’t know how the novel coronavirus is evolving.”

We believe that the economy of China will have strong recovery as long as governments and companies cooperate closely. We also look forward to the coordinated international policies, which is extremely important for the worldwide recovery.

About E.J.McKay

E. J. McKay is a Shanghai-headquartered investment bank with a special focus on mergers & acquisitions. We are one of the most long standing independent investment banks in China, with core business of mergers & acquisitions and financing advisory.