The current COVID-19 pandemic has many investors wondering what’s in store for global markets. In this current climate, CDSPI offers views from our partner, Schroder Investment Management on whether China’s experience can provide a gauge of what to expect elsewhere.
As the novel coronavirus (COVID-19) reaches pandemic proportions, and country after country follows the example of China in enacting widespread quarantines and shutdowns, it is natural to ask what the economic damage is likely to be. Every country’s experience will differ, depending on the choice of policy response.
In the interim, however, we can look to Chinese economic data for an idea of what to expect elsewhere. The country appears to have contained the outbreak, at least for now, with new infections close to zero. To achieve this, the authorities enacted a near two-month shutdown of most of the economy, and restrictions seem unlikely to be fully relaxed for some time. There is still a risk of a resurgence of infection, either domestically or via imported cases.
The cost of containment
The cost of this approach is beginning to surface in the monthly data. We now have information on the economy’s performance in the first two months of the year, and it makes for grim reading. Wherever we look in the Chinese economy, we see double digit declines. Retail sales contracted 20.5% year-on-year (y/y) for the first two months of 2020. Online sales held up better but still recorded a decline of 3% y/y, having grown at a double-digit pace throughout 2019. So, while online shopping might be expected to prove more resilient than the bricks and mortar variety, even in e-commerce heavy China it is clear COVID-19 still poses a serious headwind.
A dramatic decline in first quarter activity
We do expect official data to report a weak first quarter, but still see it as being a low positive, followed by a strong rebound and a victory in the “people’s war” over the virus. Currently, as a result, we still forecast 5% growth for this year. However, we are certainly alive to the risk that the monthly data for the start of the year reveals a greater willingness to face economic reality. We think if GDP is allowed to more closely reflect the monthly data, Chinese GDP is likely to come in around 3% for 2020 as a whole, assuming no further outbreaks of COVID-19.
Managing the recovery
The measures taken so far seem to have been reasonably effective at limiting bankruptcies and layoffs, which is the response Western economies are still struggling to configure. The next step is how to inject demand. Consumption has undoubtedly cratered hard, so handouts to consumers might seem attractive.
If the state wants to immediately boost demand, the best way might be to increase infrastructure spending. While the projects may not be as efficient as hoped, they do offer an immediate source of demand for raw materials and labour and thereby a boost to demand. This is our expectation.
For all that China is often portrayed as a monolith, we know that they are often internally at odds over policy, and the same is likely true now. Whatever China chooses, as with its initial virus response, it will prove a useful case study for anxious governments the world over.
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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.