This is a crisis like no other, and is dubbed as one worse than the Global Financial Crisis in 2007-2008 by the International Monetary Fund (IMF). A report for IMF revealed that growth in Asia is expected to stall at 0% in 2020 for the first time in 60 years.
While there is huge uncertainty about 2020 growth prospects, and even more so about the 2021 outlook, the impact of the COVID-19 on the region will be severe and unprecedented. According to the study, downward revisions are substantial, ranging from 3.5 percentage points in the case of Korea—which appears to have managed to slow the spread of the coronavirus while minimising prolonged production shutdowns—to over nine percentage points in the case of Australia, Thailand and New Zealand—all hit by the global tourism slowdown, and in the case of Australia by lower commodity prices.
Within the region, Pacific Island countries are among the most vulnerable given the limited fiscal space, as well as comparatively underdeveloped health infrastructure, IMF said.
In addition to the impact from domestic containment measures and social distancing, two key factors are shaping the outlook for Asia. These include:
The Global slowdown: The global economy is expected to contract in 2020 by 3%—the worst recession since the Great Depression. This is a synchronised contraction, a sudden global shutdown. Asia’s key trading partners are expected to contract sharply, including the United States by 6.0% and Europe by 6.6%.
China slowdown: China’s growth is projected to decline from 6.1% in 2019 to 1.2% in 2020. This sharply contrasts with China’s growth performance during the Global Financial Crisis, which was little changed at 9.4% in 2009 thanks to the important fiscal stimulus of about 8% of GDP.
"We cannot expect that magnitude of stimulus this time, and China will not help Asia’s growth as it did in 2009," the report said.
Prospects for 2021, while highly uncertain, are for strong growth, according to IMF. If containment measures work, and with substantial policy stimulus to reduce “scarring,” growth in Asia is expected to rebound strongly—more so than during the Global Financial Crisis. But there is no room for complacency, as the region is experiencing different stages of the pandemic.
China’s economy is beginning to get back to work, other economies are imposing tighter lockdowns, and some are experiencing a second wave of virus infections. Much depends on the spread of the virus and on how policies respond in a comprehensive and coordinated manner.
- The first priority is to support and protect the health sector to contain the virus and introduce measures that slow contagion. If there is not enough space within countries’ budgets, they will need to re-prioritise other spending.
- Containment measures are severely affecting economies. Targeted support to hardest-hit households and firms is needed. This is a real economic shock—unlike the Global Financial Crisis—and requires protecting people, jobs, and industries directly, not just through financial institutions.
"The pandemic is also affecting financial markets and how they function. Monetary policy should be used wisely to provide ample liquidity, ease financial stress of industries and small and medium-sized enterprises, and, if necessary, relax macroprudential regulations temporarily. In addition, external pressures need to be contained. Where needed, bilateral and multilateral swap lines and financial support from the multilateral institutions should be sought. In the absence of swap lines, foreign-exchange market interventions and capital controls may be the alternatives," the report added, saying:
Targeted support, combined with domestic demand stimulus in a recovery, will help to reduce scarring, but it needs to reach people and smaller firms.
According to IMF, Asian economies have taken several initiatives in this direction with direct support for health sectors, direct fiscal stimulus packages—which in some advanced Asian economies are substantially bigger than the response during the Global Financial Crisis. And many economies have put in place measures aimed at helping small and medium-sized enterprises.
Central banks across the region have moved to provide ample liquidity, cut interest rates and some have used quantitative easing. But additional actions may be needed for emerging-market Asian economies that have limited space for increased spending in their budgets. If the situation deteriorates, many emerging economies may to be forced to adopt a “whatever it takes” approach, despite their budget constraints and non-internationalised currencies. In many cases, they will face policy trade-offs.
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