10 Sep 2020
The COVID-19 pandemic was a health crisis that morphed into an economic crisis on a global scale, the likes of which we had never seen.
Border closures and lockdowns upended businesses and workers around the world. Unprecedented monetary and fiscal policy support were provided to stave off a collapse in the global economy. But this was not enough to prevent the deepest global recession in living memory.
"In emerging Asia, ANZ Research estimates the region’s GDP growth will only suffer a small contraction in 2020, far outperforming the rest of the world.”
ANZ Research estimates global gross domestic product (GDP) contracted by 2.8 per cent in 2020, far worse than the 0.1 per cent contraction in 2009 during the global financial crisis (GFC).
In emerging Asia, ANZ Research estimates the region’s GDP growth will only suffer a small contraction in 2020, far outperforming the rest of the world. However, this masks a wide divergence in performance across economies.
Levels of impact
China was the first country to be hit with the virus but they were also the first to successfully contain it. This allowed the Chinese economy to recover and return to positive GDP growth from the second quarter of the year. Taiwan and Vietnam are the other two economies that will post positive GDP growth for 2020 as a whole, thanks to quick and early coronavirus containment of the outbreak without the need for stringent lockdown measures.
When deconstructing the region’s GDP performance by export reliance and per capita levels, several common currents surface. The two most domestically-focused economies in the region – India and Indonesia – saw large declines in growth as a result of restrictive movement measures which dented domestic demand. Their recovery so far has lagged behind as COVID-19 cases remain high.
The negative economic impact among the advanced Asian economies – South Korea, Singapore, Taiwan and Hong Kong – were more muted than seen during the Asian financial crisis or the GFC. The fact these economies were also more successful in their pandemic response campaigns helps explain this. Also helping hold up their economies was the rebound in exports, thanks to strong demand for tech products and biopharmeceuticals amid the pandemic.
The last group – middle income Southeast Asian economies – saw a larger contraction in aggregate despite mixed results in their coronavirus containment efforts. Malaysia entered a nationwide lockdown while the Philippines imposed strict restrictions around Metro Manila, leading to sharp declines in domestic activity. Vietnam and Thailand fared much better at managing the outbreak; but while Vietnam’s economy has not been badly affected, Thailand’s growth was dented due to the loss of international tourists, which account for the largest share of GDP in the region.
What is clear is the extent of the downturn - and the magnitude of the rebound - is dependent on the speed and success of each economy’s COVID-19 containment efforts. In this aspect, the latest COVID-19 developments across the region have been mixed.
At the time of writing, China continues to keep the virus at bay; hence the strong growth momentum in the economy, with retail sales growth back in positive territory on a year-on-year basis. India and the Philippines, where infections surged in August and September, are now seeing a sharp downtrend in new daily cases, which is a positive sign that should lead to an improvement in domestic activity.
On the other hand, the pandemic has continued setting records in Indonesia and Malaysia, as the outbreak is far from being under control. South Korea and Hong Kong, which had managed the outbreak well earlier in the year, are now experiencing their third and fourth wave of infections respectively. The speed of the resurgence also shows that early success is transient as continued vigilance is required going forward.
Ultimately, it’s clear COVID-19 will not disappear by itself and even the best containment efforts are insufficient. This highlights how crucial a successful vaccine deployment is to normalise economic activity. The recent vaccine breakthroughs are an important development that has made a substantial improvement to the economic outlook for 2021. But a period of managing the outbreak is still required until a global vaccination programme is underway. The timing of when the approved vaccine can be mass produced and distributed remains unclear but it is unlikely to be before the middle of 2021.
The advanced economies in Asia which have managed to contain the outbreak more successfully are hence likely to enjoy a quicker recovery upon the vaccine rollout. This is because it is easier to eradicate the virus if there are fewer infected cases to begin with. These economies will be able to roll out the vaccination fairly quickly across their populations. They will also likely be among the first to see their borders gradually open which will help to kick-start a revival in international travel with selected countries.
Other economies in the region will eventually see a return to normality when their vaccination covers the majority of the population. For India and Indonesia, given the size of the population and the land mass, it may require some time due to the logistics involved. But both countries will likely see a much larger unleashing of pent-up demand then.
ANZ Research forecasts emerging Asia’s GDP growth to rebound to 7.7 per cent in 2021. Leading the charge will be China which ANZ Research forecasts to have the strongest growth in the region at 8.8 per cent. The Philippines and India are the other two forecasted above 8 per cent GDP growth but this is partly due to base effects from the very deep contraction suffered in 2020.
While we can put a challenging 2020 behind us and look forward to a better 2021, the pace of recovery will be uneven. Travel and hospitality related sectors will be the last to fully recover as governments will likely take a cautious approach towards reopening borders. And some of the behavioural shifts seen during the pandemic – such as working from home, online shopping and certain social distancing measures – will likely stay for some time even as the virus is eventually eradicated. This means adapting to a new normal for many businesses as a return to the pre-pandemic way of life is unlikely.
There are also the longer-term effects of the pandemic to contend with. Government debt levels have ballooned in Asia and right around the world. Repairing the fiscal position will be a long drawn out affair and also a balancing act as withdrawing government support too soon could derail the recovery. This suggests a need to raise taxes at some point or a more focused examination of spending.
High debt levels also mean interest rates cannot move higher too fast. Central banks around the world have committed to keeping very accommodative monetary policy for a long time. This means a period of record low interest rates is here to stay. This is good for borrowers but not so for savers, particularly those reliant on fixed income. The need to search for yield will force savers to take on more risk.
So while 2021 will hopefully see the end of the COVID-19 pandemic, we will continue to live in its shadow for some time.
Khoon Goh is Head of Asia Research at ANZ
This article was originally published by the Malaysia Australia Business Council
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
10 Sep 2020
03 Jun 2020