For the global economy to recover quickly from the ravages caused by COVID-19, ways and means must be found to prevent a massive collapse in demand. Such a risk is rising because many businesses are directly impacted by the very measures imposed to contain the spread of the virus.
Cities are locked down and people are told to stay home and avoid crowds. Concerts, ball games and meetings have been cancelled, while restaurants and other venues where people gather to amuse themselves are mostly vacant.
And as countries closed down their borders, international travel has been drastically curtailed. Airlines are grounded and hotels are largely empty.
Consumer spending has crashed because people are either too fearful or unable to go out and spend. As a consequence, all businesses in industries that entail close contact with the public are now in jeopardy.
Their revenues are drying up faster than they can cut costs, and many will go bankrupt if the situation worsens. Under these conditions, a dangerous outcome is mass business closures leading to rising unemployment, creating a self-reinforcing feedback loop that locks revenue-starved companies and salary-starved households into a downward spiral.
Four Members of the Forbes Asia Panel of Economic Commentators share their insights on COVID-19’s global economic impacts, and how different regions may recover at different speed in the near term, led by China and East Asia, then Southeast Asia, including an in-depth look at how the Chinese economy is normalising.
They highlight the risk of a second order impact arising from mass business failures and spiking unemployment; and how it should be mitigated. Finally, a fallout of the pandemic is its politicisation as exemplified by the response of governments in the Mekong region.
Manu Bhaskaran: Global Recession Now A Certainty
It now appears that much of the U.S. and Europe will be in lockdown mode for the next 1 or 2 months at least. Consumer spending will plunge, businesses will not only defer hiring and capital spending but also lay off workers. The promised fiscal stimulus including direct cash transfers to individuals may help soften the blow, but it is not enough.
The U.S. and EU will grow very weakly in the first quarter (the big hit to their economies only began in early to mid-March) but will contract severely in the second quarter. From July onwards, their economies could stabilise and then return to growth. We estimate that China’s economy contracted at a drastic pace in the first quarter compared with a year ago.
In the second half of the year it should show a strong rebound and start to provide limited support to the global economy. East Asia should show a similar pattern of recovery. Southeast Asia will be behind East Asia, with Singapore, Malaysia and Thailand likely over the worst by July, but Indonesia remains a big question mark.
A serious downside risk is that COVID-19’s economic impact could exacerbate existing financial imbalances such as excessive corporate debt that have built up in recent years. An unexpected and abrupt crisis like COVID-19 could tip these imbalances over into a financial crisis. Already we are seeing the commercial paper market in the U.S. freeze up.
Insurance companies are desperately selling down assets to raise cash, reinforcing market deterioration. If business closures increase sharply as a result of mass quarantine and sudden stop in travel and tourism, existing financial fragility could blow up. If this is not managed well, the global slowdown could be substantially worse.
This is why governments are now responding on a massive scale. In addition to the magnitude of policy response, governments need to get their focus right, targeting effectively to support the most vulnerable links in the economy. What has been announced so far is just the beginning–there will be much more to come.
Jim Walker: Effective Government Policy Response Must Focus On Supporting Businesses
In response to the worsening economic environment as a result of COVID-19, central bankers and governments are scrambling to throw in the kitchen sink to stabilise the economy. Many of them are resorting to the same unfocused fiscal spending and cheap money policy response that has plagued the world economy for a decade.
It did not work then and it is not working now. Zero interest rates and quantitative easing had led to foaming financial asset bubbles even before COVID-19 struck, and the virus outbreak was the nudge that toppled the house of cards.
To ensure that the global economy can recover quickly once the worst of the COVID-19 outbreak is over, governments need to get their policy response right.
The right government policy response is to focus on supporting the business sector, especially small businesses, that have suffered from supply disruption initially, and then weakening demand as countries shut down their borders and movement of people are severely restricted.
Large scale business failures are what would transform a temporary hiatus of economic activities into a downward spiral. When businesses fail, jobs are lost, and consumer demand that was only postponed earlier gets destroyed permanently.
The primary objective of governments’ policy response must be to help businesses survive COVID-19, thus breaking the link between disruption of supply and collapse in demand.
The right kind of policies are cutting corporate taxes generally including rates, rents and license fees; delay corporate tax for a year, supporting banks which forbear on interest payments from the business sector and other measures to keep companies ticking over.
It all depends on how, when and where the money is spent. That is true everywhere and at all times but it is particularly true in an environment where a specific event has caused supply disruption, has undermined business and consumer confidence and forced restrictions on consumer movement.
In comparison, when consumers are either paralysed by fear or in lockdown, the conventional consumption stimulating measures don’t work. A rebate of HK$10,000 to each Hong Kong resident (which is what the government plans to do) would amount to very little especially if the breadwinners of the household are losing their jobs.
The biggest risk today is that as people are clamouring for governments to do more, the result is for central banks to push interest rates down further (in many instances into negative territory) and for more fiscal spending to simulate demand that is not responsive to any stimulation.
In unusual crisis conditions, running budget deficits which support businesses equally across the capital structure of the economy is the smartest thing that can be done. In that way, dislocations might be minimised although, of course, some businesses will inevitably suffer more than others as demand shifts permanently (think cruise ship lines).
Is such an approach likely? On the evidence so far, probably not but as investors we should be watching out for countries leaning towards this response. In Asia, Singapore and South Korea come out ahead of Hong Kong in that respect. To ensure that the global economy can recover quickly once the worst of the COVID-19 outbreak is over, governments need to get their policy response right.
Simon Ogus: China Getting Back to Work & to Consume
Given Beijing’s belated but subsequently draconian reaction, and supplemented by my own channel checking with various corporate and personal contacts across China, I had been expecting the worst to be over in China by the middle of the second quarter. And indeed, China does seem to be gradually going back to work.
Nevertheless, a second assumption of mine has clearly been spectacularly wrong. A sensible person might have reasonably expected that the rest of world would take a good, hard look at what has happened in Asia and use the time afforded to prepare and take pre-emptive action accordingly. Sadly, it appears to have not.
Exogenous risks from economic and market disruptions from Europe and the U.S. appear to be sharply on the rise. A full-blown U.S. recession or the return of a eurozone crisis that never really went away, would arguably do rather more damage globally than Chinese production going off-line for a quarter or two.
Restricting the analysis here to China, although many companies are indeed slowly restarting production and re-opening for business, the degree of normalisation varies significantly across different sectors and different types of corporate structure.
Many of the companies I talked to only had perhaps 20% of their workforce’s back on the job in mid-February, the share was nearer 50% by the end of the month, and had risen further to 70-80% towards the middle of March.
The variance comes from the degree to which a company relies on migrant as opposed to local labour, the degree to which it is capital as opposed to labour intensive, and/or can operate virtually, and the degree to which it can source both financial working capital and parts.
With respect to the migrant labour variable, the good news is that this dependency has reduced in recent years both due to supply and demand factors. The bad news is that for many companies, it has not reduced by enough.
Furthermore, for many smaller companies, especially in lighter manufacturing, the problem appears to be more financial working capital-related. Such operations have been downsizing workforces for a number of years and shifting the labour-intensive ends of the production process elsewhere.
Residual workforces are often largely local these days, but they still need to be paid! And beyond immediate financial needs, highly engineered supply chains are also highly vulnerable to inventory and component shortages. The lack of a solitary, simple yet crucial input component can basically shut down the whole process.
The principal aim of the authorities has been to avoid a spike in unemployment and a seizure of a highly-levered financial system. The People’s Bank has been focused on encouraging banks to defer loan collections and instead to roll them or indeed advance additional emergency cheap credit lines to ensure workers and other suppliers can be paid.
Payroll as well as substantial social security contributions have also been suspended. The infrastructure card will also likely be deployed, as ever, albeit somewhat sparingly compared to the past.
Those seeking solace might note that compared to the SARS outbreak, services now comprise 55% of GDP, up from 40% in 2003. The counter is that in U.S. dollar terms, nominal GDP is up eight times over the same period, so the international impact is far, far greater.
Many services can be increasingly consumed and distributed online and a large share of companies have shifted their operations to a virtual and/or home office model.
Although some pent-up demand will be unleashed as the panic subsides, many postponed consumption decisions will be permanent. More encouragingly, there are some early signs that conditions might start to be normalising as initial panic gives way to boredom and people start to more sensibly calculate the odds of catching the virus if they decide to venture out.
Thitinan Porgsudhirak: The Mekong Region’s Geopolitics Of COVID-19
Located next to China, where the capital city of Wuhan in Hubei province is ground zero for the new coronavirus outbreak, Cambodia, Laos, Myanmar and Thailand are geographically on the front-lines as it were, more exposed than most, via travel and trade, to the rapidly spreading contagion. But strangely they have reported little or no cases of infection and a strangely subdued response to a global crisis.
The lack of news about outbreaks, however, is not the result of some special immunity to the coronavirus in these countries. Instead, their reactions and responses reflect their choice to “suffer with” rather than “suffer against” China in view of their giant neighbour’s influence in mainland Southeast Asia.
From the time China alerted the World Health Organisation to several cases of the yet unnamed disease at the end of December last year to early March, Laos and Myanmar have yet to report a single case, while Cambodia has registered just one confirmed case.
As healthcare infrastructure in these three countries is limited, many suspect a woeful lack of testing and deliberate neglect as explanations as to why the numbers are so low.
Cambodia, Laos and Myanmar, which all share porous land borders with China, have built up over the years dense trade and investment ties with Chinese nationals, who frequently visit by air and by road. While it is hard to believe that COVID-19 is not more prevalent in these poorer countries, it is understandable how their governments would not want to incur the ire of Beijing.
In the case of Myanmar, China’s cooperation is vital in dealing with the ethnic conflicts in its northern states. Beijing is also underwriting the construction of a $6 billion (S$8.3 billion) railway line between Kunming in Yunnan province to the Laotian capital of Vientiane, worth the equivalent of one-third of the land-locked country’s gross domestic product (GDP), part of the China-Indochina-Peninsula Economic Corridor connection to the Belt & Road Initiative.
Cambodia is arguably the most salient among China’s client states. Its coastal Sihanoukville province is dominated by Chinese business interests and visitors, virtually a Chinese enclave bordering the South China Sea.
While Thailand’s medical industry and healthcare professionals are better equipped to handle the 50 cases that include one fatality so far, its government has also gone out of its way not to impose travel restrictions on Chinese visitors from outside Wuhan.
Well into the third month of the COVID-19 crisis, Chinese visitors to Thailand can still enter the country easily with visas on arrival. Chinese visitors comprised nearly a third of Thailand’s 36 million tourists last year, when tourism receipts contributed 12% of GDP.
Vietnam, which has prickly relations vis-a-vis China, is not in this club. Travel restrictions to keep out Chinese visitors and health measures to monitor nationals who have gone to China or came into contact with Chinese people have been stepped up. These moves are more in line with those taken by other countries, including those that have criticised China’s handling of COVID-19 such as Australia and the United States.
The upshot is that COVID-19 has taken on longer-term geopolitical ramifications. It has become politicised and polarised because it emanates from a giant Asian superpower that is aggressive and ascendant in pursuit of global supremacy.
Unsurprisingly, China has been calling in its chips, and will likely remember how it was viewed and treated during the COVID-19 outbreak and spread. China is big and powerful, its role so enmeshed in the world economy that few countries can be left unaffected when it is afflicted with such a contagious virus.
By comparison, global reactions were less intense and critical when the H1N1 flu, which was first detected in the U.S. in 2009, went on to infect more than 1.6 million and killed over 280,000 across 214 countries.