NO ONE CAN say how widely the Covid-19 pandemic may spread, and containment may take longer than currently projected. The possibility of severe financial turmoil and financial crises cannot be discounted. Sharp and protracted declines in commodity prices and tourist arrivals will challenge dependent economies across [Asia].
On such a downbeat, but realistic note, the Asian Development Bank introduces its 2020 Outlook, published on April 3. Its underlying theme is that the nascent recovery from last year’s decelerating pace of growth because of US-China trade tensions and the related global manufacturing recession has been snuffed out by the pandemic, and then some. Growth will rebound next year, the Bank believes, but not before it declines steeply this year.
For China, the Bank is forecasting growth to tumble to 2.3% for the year, against 6.1% last year and 6.7% in 2018. The high-frequency indicators from the early months of the year showing double-digit contractions in industry, services, retail sales and investment imply that the economy could likely see a double-digit contraction reported for the first quarter. The GDP figures are due on April 17.
To put that into context, the likely impact of Covid-19 will be more severe for China than that of the Asian financial crisis in 1997–98, the SARS (severe acute respiratory syndrome) epidemic of 2003 and the 2008 global financial crisis.
However, the recovery in the second half of the year implied by the growth forecast for the full year is seen carrying into 2021. The ADB expects growth will rebound to 7.3% in 2021, helped not just by the return of regular commercial activity but also by easy monetary policy and hefty and probably repeated fiscal and infrastructure stimulus on the part of governments.
The knock-on effect across the region will be as severe, as trade growth weakens further on the back of waning domestic demand, a halt to tourism, and transport and other supply disruptions because of the pandemic. The ABD forecasts regional growth of 2.2%, down from 2019’s 5.2%, but then a recovery to 6.2% in 2021. Excluding Asia’s newly industrialised economies (South Korea, Taiwan, Hong Kong and Singapore), growth is seen to slow to 2.4% in 2020 from 5.7% in 2019, and then to pick up to 6.7% in 2021.
A further drag on growth in China and the region, noted by the United Nations Conference on Trade and Development (UNCTAD), will be the fall in profits for foreign affiliates of multinational enterprises operating in the region, which in turn will reduce funds available for direct reinvestment:
On average, the top 5,000 multinationals, which account for a significant share of global foreign direct investment (FDI), have now seen downward revisions of 2020 earnings estimates of 30% due to Covid-19, and the trend is likely to continue. Hardest hit are the energy and basic materials industries, (-208% for energy, with the additional shock caused by the drop in oil prices), airlines (-116%), and the automotive industry (-47%). The latter industry was fate first to see earnings revisions anticipating the supply chain shock. Industries now expecting to be hit by a global decline in demand are rapidly catching up.UNCTAD Investment Trends Monitor, March 2020 Special Edition
As the reinvested earnings component of FDI in Asia was 41% in 2018, these substantial downward revisions foretell sizeable effects on FDI from earnings losses. Downward revisions to multinationals earnings in China average 21%, UNCTAD notes.
The risks to its forecasts, as the ADB acknowledges, are nearly all to the downside and substantial. The assumption that the pandemic will be contained globally this year and normal business conditions will return next is a ‘good-case’ one: vast uncertainty about the duration and severity of the pandemic remains. The potential for second and third waves of the outbreak exist.
Thus the ADB’s broad range for the total global cost of the pandemic of between $2.0 trillion and $4.1 trillion, equivalent to between 2.3% and 4.8% of global GDP, with China’s cost approaching 5% of GDP. As the ADB also says, ‘the possibility of a financial crisis cannot be discounted and the pandemic could also bring about fundamental changes to the global economy over the long term’.
Most notable of those would be a retreat from the globalization that has underpinned the rise of developing Asia, with multinationals repatriating production and shortening global supply chains.
However, it is not just the pandemic that hangs heavy over the outlook for the region. Trade conflict between Washington and Beijing remains a significant risk, especially if the pandemic causes China to fall short on its commitment to increase imports of US goods and services in 2020 and 2021 by $200 billion over 2017 values, as the Phase One trade agreement between the two countries requires.
As this Bystander has noted, this was always an ambitious target, as are its components for imports of agricultural, manufacturing and energy products and services. With the president of the United States facing re-election in November and the US economy already taking a severe hit from the pandemic, nothing adverse can be ruled out.