- The latest data gives confidence that China’s economy should slowly return to normal by the end of the year. But developed economies’ recovery won’t mirror China’s
- Beijing’s priority is to steady the economy. It’s likely to favour measured support over any large-scale stimulus that could risk its financial stability
It seems natural that economy-watchers would look to China for clues about other economies' recoveries from the Covid-19 pandemic. China appears to have moved past the worst of the coronavirus outbreak, and economic activity is bouncing back.
The world's developed economies, meanwhile, are just a calendar year quarter behind China in envisioning how and when to relax disease-containment efforts that have stifled activity.
Extrapolating outlooks for developed economies from China's experience is unlikely to reveal a true picture, however. The economic structures are simply too different, and I believe the pace of recovery will thus differ significantly.
Although China's economy should return to normal by the end of the year (assuming that there is no significant second wave of infection), it may take three or four additional quarters before developed economies return to normal, likely towards the end of 2021.
Data released on April 17 by the National Bureau of Statistics of China confirmed two of our expectations for the outbreak's impact on China's economy.
First, the first-quarter contraction in growth would be deep: sure enough, gross domestic product fell 6.8 per cent compared with the first quarter of 2019.
Second, resumption of activity would be quick: industrial production fell only 1.1 per cent year-on-year in March, compared with a drop of 13.5 per cent in January-February. (Data for January and February are combined to account for seasonal distortions caused by the Lunar New Year holidays whose dates vary within the two months every year.)
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Further, the data hinted strongly that our third expectation " that of a slow return to economic normalisation " will also transpire. Retail sales were down 15.8 per cent in March, only a modest improvement on a 20.5 per cent decline in January-February.
Real-time information, including reports of cancelled export orders and data showing reduced bulk carrier and container ship traffic in Chinese ports in April, strengthens the case for slow normalisation.
Coronavirus containment efforts that signal the deepest quarterly contraction in the global economy since at least the 1930s are also likely to sap demand for Chinese goods in the months ahead. Chinese factories may soon be in a position to return to full production, but without demand from the rest of the world, there might not be a need for them to do so.
There are three fundamental reasons why developed economies' recoveries won't mirror China's. First, not every government has been as forceful as China's in its containment measures. China's national lockdown in late January was effective in containing the first wave of the virus relatively quickly.
Second, China is still the world's factory. The predominance of manufacturing in China's economy mitigates the influence of the face-to-face services sector, which is likely to be slow to recover in China, unlike in countries where the services sector accounts for a far greater percentage of GDP.
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And third, China has more capacity than most developed nations for fiscal policy intended to stimulate demand, on top of measures being taken globally to cushion the immediate blow of economies in free fall.
Nonetheless, in recent years, China has come to appreciate how costly it can be to undertake stimulus at the same scale as during the 2008 global financial crisis, when it was largely viewed as having "saved the world", and during the 2015-6 slowdown.
It is more cautious than ever about introducing risks to financial stability by borrowing for increased stimulus, risks such as asset bubbles, particularly in real estate.
So instead, expect China to maintain relative economic and social stability (the government's priority), through measures that could include an expanded social welfare network, unemployment insurance and financial relief to corporations and individuals.
China might need to tolerate slower growth with such an approach; don't be surprised if you see China lowering its official growth target below the 6 per cent it had originally set for 2020. China's growth for 2020 is likely to be in the low single digits, more than 4.5 percentage points lower than what we had expected before the pandemic.
In other words, China may give global economies cause for needed optimism about the attainability of recovery. But don't count on China to save the world.
Dr Qian Wang is managing director and chief economist, Asia-Pacific, at Vanguard Investment Strategy Group
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