Coronavirus recovery: China a rare bright spot amid pandemic gloom

Current forecasts show contraction on an unprecedented scale, more serious than the 2008 crash and raising chilling thoughts about the 1930s Great Depression
Combine bankruptcies with a fall in company profits and government tax revenues are set to fall sharply just as government spending needs are set to spike

David Dodwell

Published: 9:45am, 10 Aug 2020

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As I stare out my window across Clear Water Bay, at the hundreds out sailing, kayaking, paddleboarding or simply splashing around, my wish is that we can enjoy the pandemic lockdown while we can. The winter ahead for the global economy seems set to be bad – far worse than forecasters have warned so far.

At present, we have forecasts from bodies such as the World Bank, the International Monetary Fund and the Organisation for Economic Cooperation and Development that were released in June and based on data from the first quarter of 2020. These were grim enough. The World Bank predicted a 5.2 per cent contraction in GDP for the full year, which if you take global GDP at the end of 2019 at US$87.8 trillion means a loss of US$4.6 trillion. The IMF’s World Economic Outlook predicts a 4.9 per cent contraction, which would still be a US$4.3 trillion fall.

This is contraction on an unprecedented scale, more serious than the 2008 crash and raising chilling thoughts about the 1930s Great Depression. We are moving into uncharted territory.

These sobering forecasts – and most other private sector estimates – assume the second quarter of 2020 will mark the low point. They say a “V-shaped” recovery will bring improved numbers for the second half of the year as the pandemic subsides and lockdowns are put behind us.

Guess what? Here we are, halfway through the third quarter, and there is no “V” in sight. Most economies are beginning to sense lockdowns are going to stay well into 2021. Last month, IMF deputy managing director Tao Zhang reported that “almost all our member countries are seeing their growth forecasts this year revised downward”.

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While most hard data still lags, common sense and a multitude of anecdotes point the global economy in a worsening direction. The World Bank was most perceptive in its June Global Economic Prospects report when it warned of falling investment, a crash in global trade, huge rises in unemployment, lost schooling, mounting bankruptcies and severe but uncountable costs in the largely informal economies of most developing economies.

It also warned that unlike the 2008 financial markets crash, in which 60 per cent of the world’s economies were harmed, the pandemic crash will plunge more than 90 per cent of the world’s economies into recession.

“These downturns are expected to reverse years of progress towards development goals and tip tens of millions of people back into extreme poverty,” the report said, at a time when the mistaken assumption was that lockdowns and other pandemic mitigation measures could be lifted by midyear.

The World Trade Organisation has predicted a contraction in global trade of between 13 and 32 per cent. The International Labour Organisation has forecast the lockdowns will cost the equivalent of 305 million jobs in the developed world and massive damage to incomes of 1.6 billion people in the informal economies of the developing economies in Asia, Africa and South America.

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Just as governments in these countries have no clear or accurate measures of the scale or severity of Covid-19 in their economies, so they will never deliver more than approximate measures of job losses, bankruptcies, or the impacts of poverty.

Bankruptcies illustrate how poorly available data can measure the pain ahead. In Hong Kong, the fact the legal system that deals with insolvencies has been largely shut down since early in the year means the eventual size of the bankruptcy tsunami is yet to be guessed. There are reports of many “zombie” companies currently on life support by government handouts that will fold as soon as subsidies run out.

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Insolvency experts Euler Hermes predicts a 23 per cent jump in insolvencies in Hong Kong in the year ahead, but other economies face even deeper solvency challenges as lockdowns drag on and taxpayer subsidies dry up. It forecasts a 35 per cent jump in insolvencies in 2021 compared to 2019, with a 57 per cent jump in the United States, 43 per cent in Britain, 40 per cent in China and 39 per cent in Singapore.

The negative feedback loop from so many bankruptcies is huge but so far uncounted: millions of jobs lost, office space left vacant, mortgages unpaid, surging bad debts for banks, a collapse in consumer spending as job losses and job insecurity combine to force families to reduce spending. The crash in consumption will disrupt manufacturing and the price of commodities that underpin it, creating fresh feedback loops among supply chains and oil and commodity exporters.

If you combine bankruptcies with a general fall in company profits, government tax revenues are set to fall sharply just as government spending needs are set to spike, including providing support for the unemployed and investing in cash-starved health care systems the pandemic has exposed as massively underfunded.

As the Financial Times’ Martin Sandbu noted last week: “We may have to learn to live with permanently higher debt and permanently higher taxes … If significant tax rises are indeed inevitable, the fight will move to where the heavier tax burden falls; which taxes go up and by how much.”

Set against this gloom, there have been hints of recovery. Taiwan, among the most successful economies at containing the pandemic, last week reported first-half economic growth of 0.41 per cent. Germany’s manufacturers saw orders rise by almost 28 per cent in June. China has also shown a few signs of recovery and is among a small group of economies expected to see positive economic growth in 2020.

You can say these are green shoots if you wish, but it would put you in a tiny minority. As the European Commission noted in July as it predicted an 8.7 per cent contraction in the euro area this year: “The risks to the forecast are exceptionally high and mainly to the downside.”

Maybe I should join those youngsters water-sporting outside my window. They are perhaps doing the most natural thing – enjoying today and leaving our pandemic worries to another day.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

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