Why there’s hope for APAC economies as we near the end of 2020

The destruction wrought by the COVID-19 crisis and the global policy reaction has been swift and savage, unexpectedly and brutally shutting down the planet. But the glimmers of hope surfacing, especially in the Asia-Pacific region, offers a window to the road to recovery ahead of us.

When the International Monetary Fund (IMF) first tried to come to grips with the economic fallout of COVID-19 back in April, the numbers were grim enough. The June update indicates that things got worse.

Taking a look at Europe alone, the second quarter annual growth rate for France is -18.9%, Spain is -22.1% and Italy is -17.7%¹.

The wash up of the great virus crisis will see a 4.9% drop in world output in 2020², according to the IMF’s World Economic Outlook Update published in June³. Borders have shut. Industry and consumer activity have collapsed. The labour market has been decimated. Half a billion people risk falling into poverty.

Above it all, the world has suffered the deaths of hundreds of thousands of people, with few communities untouched by tragedy.

Amid the catastrophic human and economic cost, there are notes of hope going into 2021 as the world learns more about how to manage and live with COVID-19. Though we are not at the end of this crisis, we know more now about how to manage this pandemic and keep economies breathing.

Though many countries are struggling, many are also steadily reopening their economies, reassured by signs that the COVID-19 threat will recede, albeit in knowledge of second (and possibly third) wave risks.

There are even some who hope the world can build a better future out of the rubble and usher in a new era of prosperity and growth.

“History shows that pandemics can lead to a renaissance in art and thinking,” says the World Economic Forum, the foundation behind the annual Davos meeting.

“In the 21st century this points to a new era for innovation, growth and enhanced technology governance in the service of societal and environmental goals.”

The Asia-Pacific region out in front

The IMF is projecting a bounce back in growth in 2021 as economic activity returns to normal and fiscal and monetary policy support kicks in to restore confidence. But the global recovery will be patchy, especially in countries worst hit by the virus⁴.

However, the Asia Pacific region is showing green shoots in relative terms. Though numbers and projections are constantly changing – and are hard to pin down exactly – the general pattern for the region is becoming clearer.

China and Korea led the reopening of the global economy as their stringent testing and containment programs caused the virus to peak in February. Australia and New Zealand also got ahead of the virus early, despite both experiencing second waves and second lockdowns⁵. This head start has put the Asia-Pacific region on the way to leading the global recovery, ever cautiously.

Further, China has been at the vanguard of the economic rebuilding. As the first to suffer the virus, it was also the first to emerge and open its economy and urging its people back to work. The government’s ability to track its population using mobile phones, facial recognition and big data gives it unique powers to trace and isolate the virus.

To be sure, the Chinese economy suffered in the first quarter. As industrial production, retail sales and business investment fell, China suffered a first quarter contraction of 6.8% year on year⁶. However, the second quarter was back in growth and the IMF expects China to stay in growth for the year, with growth projected to decline from 6.1% in 2019 to 1.2% in 2020 as stimulus kicks in⁷.

That will not be enough to keep the Asia-wide economy in growth for 2020 however, with the IMF forecasting a 0.8% contraction⁸.

“This is the worst growth performance in almost 60 years, including during the Global Financial Crisis and the Asian Financial Crisis,” said the IMF⁹. “That said, Asia still looks to fare better than other regions.”

Governments step up worldwide

Governments and central banks have taken this economic crisis seriously, providing unprecedented support to the global economy. It seems the learnings of the Great Depression – when government spending was cut – have not been forgotten¹⁰.

The US Federal Reserve cut rates by a total of 1.5 percentage points during the crisis to a range of 0% to 0.25% and restarted a significant bond buying program¹¹. The European Central Bank launched a €750 billion program to purchase public and private sector securities¹².

Fiscal policy has also played an important role. At about the midway point of 2020, the IMF estimated some $9 trillion in direct budget support, loans, equity injections and guarantees¹³. The G20 accounts for $8 trillion of the fiscal stimulus which measures 4.5% of GDP¹⁴.

This stimulus is larger than during the global financial crisis. Australia has implemented direct fiscal stimulus, consisting of expenditure and revenue, worth 10.6% of gross domestic product, according to measures by the IMF of government spending in response to COVID-19 from January to April 2020¹⁵. Japan was one of the few countries to provide greater support than Australia with approximately 10.0% of gross domestic product in direct fiscal support. The US fiscal stimulus was 6.9% of GDP while the UK spending represented 3.1% of GDP over that time period.

When loans, equity injections and guarantees are included, Germany and Italy head the pack, pledging more than a quarter of GDP to support their economies¹⁶.

“Broad-based fiscal stimulus can pre-empt a steeper decline in confidence, lift aggregate demand, and avert an even deeper down- turn,” said the IMF in April. “But it would most likely be more effective once the outbreak fades and people are able to move about freely.”

¹Bloomberg
²https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
³https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
⁴https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
⁵https://www.health.gov.au/news/health-alerts/novelcoronavirus-2019-ncov-health-alert/coronavirus-covid-19-current-situation-and-case-numbers and https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus/covid-19-current-situation/covid-19-current-cases
⁶https://www.reuters.com/article/us-china-economy-gdp-instantview/instant-view-chinas-first-quarter-gdp-posts-first-decline-on-record-as-virus-shuts-down-economy-idINKBN21Z09O
⁷https://blogs.imf.org/2020/04/15/covid-19-pandemic-and-the-asia-pacific-region-lowest-growth-since-the-1960s/
⁸https://blogs.imf.org/2020/04/15/covid-19-pandemic-and-the-asia-pacific-region-lowest-growth-since-the-1960s/
⁹https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
¹⁰https://www.ampcapital.com/au/en/capital-edition/edition-7/the-big-differences-between-the-great-depression-and-covid19
¹¹https://www.brookings.edu/research/fed-response-to-covid19/
¹²https://www.ecb.europa.eu/press/pr/date/2020/html/ecb
¹³https://blogs.imf.org/2020/05/20/tracking-the-9-trillion-global-fiscal-support-to-fight-covid-19/
¹⁴https://blogs.imf.org/2020/05/20/tracking-the-9-trillion-global-fiscal-support-to-fight-covid-19/
¹⁵https://www.imf.org/~/media/Files/Publications/fiscal-monitor/2020/April/English/onlineannex11.ashx?la=en
¹⁶https://blogs.imf.org/2020/05/20/tracking-the-9-trillion-global-fiscal-support-to-fight-covid-19/