Once again, South Korea seems to be withstanding the crisis better than developed nations generally. The effective management of the health crisis and the government’s massive stimulus package paved the way to a shallower recession than in other countries in the first half of 2020. However, the new social distancing measures introduced at the end of August and the persistent weakness of exports will hold back growth over the coming months. In the short to medium term, macroeconomic fundamentals are likely to remain very solid: government deficit and debt levels remain modest, inflation is under control and external vulnerability is very low.
Between April and June 2020, India’s economy contracted by nearly 24% compared to the same period last year. This unprecedented contraction can be attributed to the collapse of domestic demand. Although the economy has rebounded since June, it is still fragile and well below pre-crisis levels, prior to the outbreak of the Covid-19 pandemic. The central bank and government did not have much support capacity, but even this has been eroded by higher prices and a drop-off in fiscal revenue. Public debt is expected to swell to nearly 89% of GDP, and will strain the country’s future development projects, especially given that government spending contributed to nearly 30% of growth last year.
For the first time since the 1998 crisis, Indonesia is expected to enter recession in 2020. In Q2 2020, the economy contracted by more than 5%, and the recovery should be slow. Domestic demand is struggling to pick up, and Jakarta has just been put under a partial lockdown again. Fiscal support has been slow in coming: planned fiscal spending still hasn’t materialised in the first seven months of the year. Even so, the deficit is under control and the central bank is acting as the lender of last resort. In H2 2020, the government hopes to consolidate the recovery via a massive support package for low-income households. Even though inflation is under tight control, the poverty rate could reach 11.6% according to the World Bank (vs 9.2% in 2019).
The Japanese economy is in a particularly difficult position. Japanese GDP contracted for the third consecutive quarter in Q2 2020: falls of 1.8% in Q4 2019 (quarter-on-quarter) and 0.6% in Q1 2020 were followed by a record-breaking contraction of 7.9% in Q2 2020...
The economy continues to recover. Initially driven by a rebound in industrial production and investment, the recovery broadened over the summer months. Exports have rebounded and activity has also picked up in the services sector. Yet it continues to be strained by the timid rebound in household consumption, which is far from returning to normal levels. The unemployment rate began to fall right again after the end of lockdown measures, but this decline has been accompanied by an increase in precarious jobs and large disparities, with the unskilled and young college graduates being particularly hard hit.
It will take a long time for Japan to erase the economic shock of the Covid-19 pandemic. Even though lockdown measures were less restrictive than in other countries, Japanese GDP is poised for a record contraction in 2020. The expected rebound could be mild. Household confidence and business activity indicators have stagnated, sending mixed signals about the strength of domestic demand. The Covid crisis is bound to accentuate the weaknesses of the Japanese economy: sluggish growth, low inflation and record-high public debt. Prime Minister Shinzo Abe’s resignation is unlikely to lead to any major policy changes as Japan continues to pursue expansionist economic policies.
China’s economic dynamics continued to improve in August 2020. As seen in our monthly Pulse, the expansion of the blue area compared to the dotted area shows a more widespread recovery in activity. Whereas the improvement since March was initially driven by the rebound in industrial production and investment in public infrastructure and real estate, it has now reached other parts of the economy [...]
Activity indicators for July reflected the continued recovery of the Chinese economy. Real GDP growth already rebounded to 3.2% year-on-year in Q2 2020, up from a 6.8% contraction in Q1. The acceleration in investment growth since March has been driven mainly by public infrastructure projects, the construction and the real estate sectors, which have been supported by the government’s stimulus measures. Manufacturing investment has recovered more slowly, held back by the financial difficulties of corporates, particularly amongst SMEs. In the second half of 2020, investment in public infrastructure is set to remain strong, helped by continued expansionary fiscal policy
China’s economic dynamics continued to improve in June. In fact, real GDP rebounded by 11.5% quarter-on-quarter (-3.2% year-on-year), which was strong enough to completely regain the ground that was lost in Q1...
The economy has been recovering gradually since March, and the rebound in real GDP was strong enough in Q2 2020 to enable it to recover rapidly the ground lost in Q1. Yet the shock triggered by the pandemic and the ensuing lockdown measures has severely weakened some sectors (such as export-oriented industries), some corporates (notably micro-enterprises and SMEs) and some households (especially low-income earners). The central bank has cautiously eased credit conditions and the government has introduced a stimulus plan estimated at about 5 points of GDP for 2020. Public investment in infrastructure projects remains the instrument of choice, but direct support to corporates and households is also expected to boost private demand.
India should report an unprecedented contraction in real GDP this year. The big question is how strong will it rebound thereafter? The rating agencies have begun to doubt whether India will return to its potential growth rate in the years ahead because its economic slowdown began much earlier than the Covid-19 crisis. India’s slowdown dates back at least to 2018, and could even be an extension of the 2009 financial crisis. Since 2014, real GDP growth seems to have been driven solely by positive external shocks, creating the illusion of robust growth. Yet the banking sector is still much too fragile to restore GDP to the growth rates of the past.
The economic rebound expected in H2 2020 has been slow in the making. For the moment, the pandemic seems to be under control, and there have already been several phases of reopening, but domestic demand remains sluggish. Exports also fell sharply again in May. Above all, it is the absence of international tourists that is straining growth prospects, at least in the short term, because fiscal and monetary support measures – though massive – will not suffice to totally absorb the shock. As a result, the recovery is likely to be more restrained than in the other Asian countries.
The economy has been recovering gradually since March, and the rebound in real GDP should be strong enough to enable it to recover rapidly the ground lost in the first quarter. Yet the shock triggered by the pandemic and the ensuing lockdown measures has severely weakened some sectors (such as export-oriented industries), some corporates (notably micro-enterprises and SMEs) and some households (especially low-income earners). The central bank has cautiously eased credit conditions and the government has introduced a stimulus plan estimated at about 5 points of GDP for 2020. Public investment in infrastructure projects remains the instrument of choice, but direct support to corporates and households is also expected to boost private demand.
Like the vast majority of economies, Japan will go into recession in 2020. The expected rebound in 2021 is likely to be relatively mild. The latest economic indicators reveal an economic situation that is still highly deteriorated compared to normal times. Once again, massive fiscal stimulus has been set in motion. The Bank of Japan’s monetary policy, notably through the Yield Curve Control, should largely reduce the risk of higher financing costs due to the expected rise in public debt.
Like most economies, Japan was hard hit by the Covid-19 crisis in the first half of 2020. The rebound of the Japanese economy will depend notably on an upturn in private consumption, which has been in a slump since year-end 2019. Retail sales plunged sharply again in May, for the third consecutive month. Sales were down 12.3% year-on-year (y/y), after declining 13.9% in April and 4.7% in March [...]
Our barometer shows an improvement in China’s economic momentum during the period between March and May 2020, compared to the preceding three months. This came as no surprise as economic activity collapsed in February, the first month of the lockdown, before beginning a very gradual recovery in March...
In fiscal year 2019/20 (ended in March), India’s GDP growth slowed sharply to only 4.2%, and growth prospects for the current fiscal year look extremely bleak. The slowdown in 2019/20 GDP is especially alarming considering that it predates the outbreak of the Covid-19 pandemic. The economy has slowed since 2018, and even without taking into account the impact of Covid 19, growth was set to fall far short of its long-term potential of 7.3% in the years ahead. As a result, Moody’s has downgraded India’s sovereign rating. The latest economic indicators suggest a very severe contraction between April and June 2020. In April, electrical power generation and cement production fell 22.7% and 86% year-on-year, respectively, while merchandise transport plummeted 35%
Economic activity contracted sharply in February, the first month of the lockdown, before rebounding very gradually in March and April. The recovery is bound to be very slow after this brutal first-quarter shock [...]
China’s population and its economy were the first to be struck by the coronavirus epidemic. Activity contracted abruptly during the month of February before rebounding thereafter at a very gradual pace. Although the situation on the supply side is expected to return to normal in Q2, the demand shock will persist. Domestic investment and consumption will suffer from the effects of lost household and corporate revenues while world demand is falling. The authorities still have substantial resources to intervene to help restart the economy. Central government finances are not threatened. However, after the shock to GDP growth, the expected upsurge in domestic debt ratios will once again aggravate vulnerabilities in the financial sector.
India was not spared the coronavirus pandemic. The economic slowdown will be all the more severe with a protracted lockdown of the population. The government also lacks the fiscal capacity of the other Asian countries to bolster its economy. Already strained by the economic slowdown of the past two years, public finances are bound to deteriorate further. Public debt could reach 75% of GDP by 2022. Refinancing risks are low, but the cost of borrowing could rise for the long term if the rating agencies were to sanction its public debt and deficit overruns. India still has sufficient foreign reserves to cover its short-term liabilities.
The COVID-19 crisis will have a huge impact on an economy that was already weakened slightly by the slowdown in global trade in 2019. Yet Indonesia’s macroeconomic fundamentals are strong: its public finances are solid, the banking sector is robust and both companies and households have very little debt. The country has sufficient foreign reserves to cover its short-term financing needs. Yet the rupiah is bound to remain under fierce downward pressure: the current account deficit is only partially financed by foreign direct investment, and capital outflows have reached unprecedented levels since 31 January.
The coronavirus crisis has hit a fast-growing economy, which expanded by more than 6% year-on-year in H2 2019 and looked set to continue at the same pace in 2020. The pandemic and the very strict lockdown imposed by the Duterte government will cause all the engines of growth to seize up: production will stop in the country’s economic centre, the fall in domestic demand will be exacerbated by reductions in remittances from workers abroad and losses in the informal economy, tourism will collapse and exports of goods and services will follow suit. This is a substantial shock, but the strong macroeconomic fundamentals and the modest level of government debt give the authorities scope to introduce support measures.
The Covid-19 pandemic strikes an economy that has already been weakened by several quarters of decline in merchandise exports, tourism, private consumption and investment. Since February, the government has launched a major fiscal stimulus plan representing about 10% of GDP. The plan includes direct support measures in favour of corporates and households. Additional structural measures will be needed going forward, in order to fuel a sustainable rebound in private demand and bolster medium-term economic growth prospects. Thanks to abundant fiscal reserves and minimal debt, the government has comfortable manoeuvring room to pursue an expansionist policy for several years to come.
The shock of the Covid-19 pandemic comes hard on the heels of a difficult second half of 2019 for the Japanese economy. Like many others, the country is exposed to the economic fallout from this crisis. Its significant economic dependence on China, for imports, exports and tourist flows, further weakens the Japanese economy. The latest economic indicators suggest that the shock will be important. Japan will thus go into recession this year. Lacking adequate room for manoeuvre on the monetary front, fiscal policy will need to provide support. To this end, the Abe government would be preparing a major stimulus package.
