Image Credit: Emergenza coronavirus by Dipartimento Protezione Civile/Flickr; Licence: CC BY 2.0.

Written by Bob Savic.

News travels fast – to coin a time-worn phrase. Alas, the COVID-19 (C19) contagion appears to be travelling with equal speed, and with devastating consequences (both physical and psychological) for a world population increasingly fearful of the disease’s spread.

At the time of writing, over 90,000 confirmed cases of C19 have been reported worldwide, with the contagion spreading rapidly around the globe. The bulk of these cases are still in mainland China, which accounts for over 80,000 of them. Other Asian countries, especially South Korea, Iran and Japan, are among the top five countries suffering confirmed cases, with Italy being the first European state in which the virus has made its mark outside of Asia.

Given the accelerating and virulent global spread of the disease, world governments have been criticised for not reacting quickly enough to contain the problem. In response to economic policymakers’ anaemic actions thus far, the international financial markets have reacted much more quickly, generating the largest global equity market sell-off since the 2008 global financial crisis. Most worryingly, this was accompanied by a pronounced capital flight to safe-haven assets in the form of government bonds. Notably, the US 10-year treasury fell to a record low of 1.03%, from 1.7% only a week earlier.

As C19 has spread worldwide, even to the shores of the United States, the virus is having a profound effect on the global supply chain

While the 10-year Treasury yield returned to higher levels of around 1.10 per cent at the beginning of March 2020, the persistently inverting interest yield curve – with the US Federal Funds rate standing at 1.25 per cent, which is at the short end of the spectrum – is increasingly indicative of a recession in store for the American economy. An economy which, only a month prior, had been forecast by most economists to grow at a reasonably healthy clip of around 2.3 per cent over 2020.

However, as C19 has spread worldwide, even to the shores of the United States, the virus is having a profound effect on the global supply chain. Most of the countries which have had to shut down production capacity have been the global manufacturing powerhouses. This includes China – the world’s largest de facto tool shop – which has shuttered capacity by up to 50 per cent in order to control the spread of C19, although there are signs of some capacity gradually coming back on-stream.

Beyond China, the first line of manufacturing economies to have been impacted by cuts and shortages in the global supply chain is the intermediary low-cost production hubs of Thailand, Vietnam and Malaysia. Their respective production shortages and shutdowns have in turn adversely dented the final value-added export powerhouses of South Korea, Taiwan and Singapore. Now the production outages have shifted onto a global platform, along with C19, in central Europe’s manufacturing heartlands of northern Italy, southern Germany, Switzerland and France.

China’s economy feels the heat from C19

China’s economy was steamrollering along with an annual growth rate of 6.1 per cent in 2019 and, given its status as the world’s second-largest economy, it added over US$1 trillion to global Gross Domestic Product (GDP) for that year. However, that level of economic expansion is slated to fall in 2020.

According to the World Bank’s forecasts earlier in 2020 (before the known presence of C19), annual growth in China was expected to come down to 5.9 per cent. A more recent forecast by the International Monetary Fund (IMF), which takes the impact of C19 into account, estimates growth for 2020 to be 5.6 per cent. Needless to say, the latter figure assumes that China’s policymakers will react quickly and resolutely to counteract any C19-induced slowdown, particularly in the first three months of 2020.

The squeeze on economic growth is already evident in data coming out of China. For instance, official government surveys released at the end of February 2020 by China’s National Bureau of Statistics show both manufacturing and services slumping to record lows due to C19’s disruption of nationwide supply chains and consumer demand.

These findings tally with the (arguably more reliable) private market surveys in the form of the Caixin China Manufacturing Purchasing Managers’ Index. This shows the manufacturing sector’s performance for February 2020 plunging to record lows in all the major metrics including levels of employment, new orders and output. In the meantime, exports have collapsed at their fastest rate in the survey’s history due to both order cancellations and shipping bottlenecks.

China’s policymakers swing into action

As knowledge of the deadly virus and its scale became known beyond the place of its origin in the central Chinese city of Wuhan, the country’s central government acted with unprecedented speed and largesse in limiting the spread of the virus and facilitating its treatment. China’s speed of engineering stunned the world with the construction of brand new hospitals and other healthcare facilities in a time frame of only 10 days in some cases. Correspondingly, the central government ordered the shutdown of several cities in various infected areas, populated with tens of millions of inhabitants.

The Chinese government then turned to providing an equally extensive and rapid response in its emergency economic actions. Most significantly, the authorities enacted various key macro-prudential policies. These included directing the banking system not to recall bad loans made to the cash-starved small and medium corporate sector.

Additionally, China’s banks extended a record amount of credit – up to 3.34 trillion Chinese Yuan (CNY) in new loans for businesses, far exceeding the corporate loan advances of CNY 424 billion made in the previous period. By contrast, the amount of household loans, mainly in the form of mortgages, declined to CNY 634 billion from CNY 645 billion as the government directed all its effort to shoring up the fragile small business sector.

The People’s Bank of China (PBOC), the central bank, has since announced that managing the economic spillover from C19 has become its top policy priority through the expansion of medium- to long-term credit support for companies and lower lending rates. For local authorities, similar measures (though on a smaller scale) have also been launched. These include central government subsidies for local authorities of up to CNY 8 billion, with just under half being channelled into Hubei province, which is the region most devastated by C19.

Japan’s officials recognise the scale of the unfolding crisis but pledge limited measures

With reports of Japan’s authorities having underestimated the number of people infected by C19 and a sharp rise in the number of cases – reaching over 900 in a short space of time – there has already been talk of cancelling the 2020 Summer Olympics in Tokyo. Fears over the virus spreading and its knock-on economic consequences come amid flagging economic performance for the world’s third-largest economy. As a result, Barclays estimates first quarter growth for Japan to be -3.1 per cent, well below the anticipated -0.3 per cent decline previously forecast.

In response to the growing domestic economic crisis in the country, Japan’s central banker, Haruhiko Kuroda, pledged to take appropriate action to calm the jittery financial markets, including liquidity injections and asset purchases. However, given that Japan already has negative official rates and a negative yield on its 10-year Japan Government Bond (JGB), further monetary accommodation may be like pushing on a very loose string.

Japan’s real economy would likely benefit more from substantive macro-prudential and fiscal measures, particularly in light of the steep fall in capital spending and precipitous drop in private-sector output during February 2020. It therefore remains to be seen whether Prime Minister Shinzo Abe’s government is able to put together any further non-monetary support packages, especially as concerns mount over the cancellation of the Olympic Games.

Other Asian governments’ response

The region’s other governments have reacted in a variety of ways to the emerging economic fallout. Somewhat disappointingly, South Korea’s government has not pushed ahead with any specific measures, surprising analysts by keeping interest rates on hold at a recent Bank of Korea meeting. This unexpected inaction coincides with a surge in C19 cases in the country, alongside the central bank’s own projections of a slowdown in economic growth in 2020, possibly even hitting -2 per cent.

By sharp contrast, the government of Singapore announced major plans to cope with a likely economic contraction. These have mainly rested on fiscal, as opposed to monetary, actions, including deficit spending equivalent to 2.1 per cent of GDP or 10.9 billion Singapore dollars (S$) in 2020. This would be the highest level of government expenditure in more than 15 years, as the economy braces itself for a probable recession over the full year.

Meantime, Hong Kong’s protest-besieged government has launched several fiscal measures to boost an already recession-stricken economy. Probably the most eye-catching of these is the so-called ‘helicopter money’ initiative. This involves a cash payment of 10,000 Hong Kong dollars (HK$) to every permanent resident over the age of 18. Along with significant across-the-board tax cuts, the total emergency package would amount to a record budget deficit of HK$ 139 billion, or 4.8 per cent of GDP in 2020.

Emerging Southeast Asian countries have been considering a broader mix of monetary and fiscal measures across the whole region, where manufacturing output has fallen, schools have closed, tourism is down and retail business has come under severe pressure. Malaysia has already cut its key lending rate to a 9-year low, as the authorities there try to grapple with the additional political uncertainty in the wake of Prime Minister Mahathir Mohamad’s resignation.

Indonesia has announced that it is preparing a second financial package, shortly after the first was introduced, in order to cope with the supply chain disruptions arising from the C19 crisis. Meanwhile, Thailand’s government has launched plans to add new fiscal and financial measures to last year’s delayed budget in order to weather the international and domestic economic storm.

Lastly, although India has been one of the countries least affected in terms of confirmed C19 cases and associated supply chain disruptions, the Reserve Bank of India has announced that it is prepared to carry out measures necessary to preserve financial stability, market confidence, and the orderly functioning of financial markets.

C19 policy actions shackled by existing limitations

Asian governments have responded with a patchwork of individual economic measures to reflate their economies in the wake of the economic fallout of C19. While most of the regional economies, particularly those of China and Southeast Asia, have experienced the world’s highest growth rates since the 2008 global financial crisis, the economic impact of the virus is set to have severe implications for both the social and economic development of these countries.

This can only exacerbate the existing problems already being faced by their respective governments. In some cases, this involves dealing with geopolitical and trade tensions, while others are having to cope with domestic political upheaval, and some find themselves tasked with having to manage both sets of issues simultaneously. Moreover, C19’s economic repercussions are also likely to challenge the region’s more developed economies. These remain mired in resolving the long-term decline in structural growth arising from falling working populations, worsening economic inequality, rising household debt, and the impact of technological progress on long-term employment.

On a broader global level and in the short term at least, the key to an effective economic response may entail concerted global policy action among the larger world economies. However, somewhat disappointingly, in a statement issued on 3 March 2020 following a teleconference among G7 finance ministers and central bankers, while policymakers pledged to use all appropriate policy tools in support of global economic growth, they failed to provide details about any coordinated stimulus measures.

In many ways, the lack of specifics in the G7 statement is due to the limited armoury these governments can now employ in dealing with an external shock to the global economy because of their emergency levels of low-interest rates; a universal problem currently afflicting all G7 developed economies. This situation limits the potential effect of any additional monetary policy stimulus in boosting the real economy while also heightening the risk posed by the inflated asset markets.

Consequently, at least as far as action by the central banks is concerned, measures are being taken on an individual basis, such as the US Federal Reserve’s surprise emergency 0.5% rate cut shortly after the G7 statement was issued. Both the Bank of Canada and the European Central Bank are likely to follow with their own rate cuts in the near future. Most of the G7 governments are also constrained in terms of what they can achieve on the fiscal front, since levels of public debt generally stand at record high levels relative to GDP. This is especially the case for Japan and Italy, but even for the US, where legal constraints also place a limit on how much public debt can be raised above national income.

So while for now the G7 have shied away from taking policy action – perhaps in favour of keeping their powder dry – Asia’s economies will have to depend on their own domestic stimulus measures and initiatives to revive their flagging economic growth prospects. The danger with relying on this single-barrel approach, however, is that it might turn out to be the last real opportunity for any credible concerted action deploying the combined economic firepower of Asia and the G7, should the economic conditions unexpectedly deteriorate further.

Bob Savic is a Visiting Professor at the Asia Research Institute, University of Nottingham.

*Articles published by The Asia Dialogue represent the views of the author(s) and not necessarily those of The Asia Dialogue or affiliated institutions.