The recovery of the world economy from COVID-19 is expected to be prolonged and fragile, with one economist predicting the current rebound will be derailed by a second downturn.
“So based on earlier pandemics, that in of itself casts doubt on this optimistic call for a V-shaped recovery. It may seem like a V right now, that is not a sustainable outcome,” said Stephen Roach, a senior fellow of the Yale Jackson Institute for Global Affairs.
Roach, a former Asia chairman of Morgan Stanley, cited research on 12 past large pandemics dating back to Europe’s Black Death in the 14th century conducted by economists at the Federal Reserve Bank at San Francisco and University of California at Davis.
The impact of earlier pandemics lasted a long time, Roach said on July 8 at a webinar of the Our Hong Kong Foundation, a nongovernmental organization which promotes Hong Kong interests founded by former Hong Kong chief executive Tung Chee-hwa.
The world economy will undergo a W-shaped trajectory, Roach predicted. “The rebound we are experiencing now will be followed by another downturn in the economy.”
The world economy declined more sharply in the second quarter this year than ever in history, Roach said. The IMF projects global GDP will fall 4.9 percent this year, more than that of the global financial crisis which was less than one percent.
As the lockdown is easing in the US, China and other countries, there will be a sharp rebound in world GDP in the third quarter, he said. “I don’t think we will be able to sustain that statistical increase into the fourth quarter or even the first quarter of next year, even if we are not going to have a relapse, I think it will be hard to sustain it.”
“If we have a second wave or a relapse of the virus, it will be a very volatile bottoming process in the world. It will be manifested through equal volatility in financial asset prices as well. To the extent that the world is very much interdependent, this will have reverberations across major economies in the world, including China,” Roach warned.
The risks of resurgence of the COVID-19 pandemic are budding in various parts of the world. In the US, the number of new cases surpassed 60,000 each day on July 8 and 9, breaking earlier records. In Hong Kong, the Secretary for Food and Health Sophia Chan announced on July 9 the reintroduction of social distancing in restaurants, as the city reported 34 new local cases plus eight imported new cases that day, after weeks when zero daily new cases was common.
“The US economy is recovering towards normalcy, but public health problems are an extremely big potential threat to economic recovery,” said Tommy Wu, lead economist of Oxford Economics, an economic forecaster headquartered in Oxford, UK.
Wu forecast a big rebound of 8.5 percent in world GDP in 2021. Nonetheless, despite global GDP rising again from 2021, two percent of GDP will be irrevocably lost in the years ahead, Wu said at an Oxford Economics webinar on July 7.
While Roach predicts a roughly W-shaped recovery, Wu expects the rebound in the world economy to be U-shaped where it will be a prolonged process.
Presently, economic recovery in South Korea and China including Hong Kong is good, Wu said. “China’s economy is mostly back on track, but employment is still down.”
In Asia Pacific this year, China and Vietnam will be the only two countries to have GDP growth, while GDP will shrink in all other major economies, forecast Oxford Economics and Haver Analytics, a US provider of economic data. All economics in Asia Pacific will enjoy robust GDP increase next year, with Philippines the highest at 11.8 percent followed by India at 10.8 percent. From 2020 to 2021, GDP growth will rebound from 2.0 percent to 8.1 percent for mainland China, -6.0 percent to 6.4 percent for Hong Kong, -6.0 percent to 7.1 percent for Singapore and -2.7 percent to 7.0 percent for Indonesia respectively.
Non-investment grade emerging and frontier market nations face a sharp economic downturn following the coronavirus outbreak, with many not recovering to pre-crisis levels until 2022 or beyond, said a Moody’s report on July 6.
So far this year, the rating agency has taken negative rating action on 29 non-investment grade countries mainly due to the pandemic. Asia Pacific now has the highest share of non-stable outlooks for Moody’s. Debt affordability in Asia Pacific will deteriorate sharply in the next few years, Moody’s predicts.
“Globally, debt-to-GDP ratios will jump, often from already elevated levels, and we expect they will continue to rise over the coming years, raising fiscal challenges,” says Michael Higgins, a Moody’s analyst.
“The coronavirus shock is precipitating a significant increase in external vulnerability and government liquidity risks among non-investment grade sovereigns, while political tensions remain present, especially as the pandemic heightens focus on many social risks,” added Higgins.
All non-investment grade emerging and frontier market nations will experience slower growth on account of the global coronavirus shock, with 2020 growth forecasts revised down by 6.8 percentage points on average from the end of 2019, said Moody’s.
Toh Han Shih is a Singaporean writer in Hong Kong.