FEATURE

Asia’s economic recoveryStaggering along in an uncertain world

Akrur Barua

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IN ASIA, HOME to some of the fastest-growing economies in the past decade,1 COVID-192 has put the brakes on rising prosperity. Given the

virus’s health risks and the resulting need for social distancing, travel and hospitality have been hit hard, and so has consumer expenditure. With demand affected both at home and in key markets of the United States and Europe, production has weakened. The economic impact has been uneven across countries, likely due to differences in the trajectory of the pandemic so far, subsequent policy responses, and the size of the most-affected sectors in different economies.3 Until the threat of

COVID-19 ceases to exist, economies are expected to underperform their potential. And any recovery is unlikely to be swift.

Economic activity is expected to contract this year in Asia

The latest trends in economic data reveal that the global financial crisis of 2008–2009 may turn out to be a small blip compared to the current economic situation in Asia. According to the International Monetary Fund (IMF), the world

Asian economies have been hit hard due to the spread of COVID-19. And recent data reveals that while nascent recoveries are likely underway in many countries, these haven’t been swift.

Note: ASEAN denotes the Association of South East Asian Nations and ASEAN-5 includes Indonesia, Malaysia, Thailand, the Philippines, and Singapore.

Sources: International Monetary Fund (sourced through Haver Analytics); Deloitte Services LP economic analysis.

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FIGURE 1

Asian economies will likely suffer much more in 2020 than they did in 20092009 2019 2020 (f)

9.48.5

–5.4

0.8

2.5

6.1

4.2

0.7

2.0

4.9

1.0

–4.5–5.8

–2.1 –2.0

–8

–4

0

4

8

12

16

Annual real GDP growth (%)

China India Japan South Korea ASEAN-5

Asia’s economic recovery: Staggering along in an uncertain world

3

economy is set to contract by 4.9% this year, compared to just a 0.1% decline in 2009 when the previous downturn was raging.4 And Asia is unlikely to escape unscathed. The IMF expects the emerging and developing Asia5 to contract by 0.8% in 2020, a sharp contrast to the 7.6% expansion in 2009 and average annual growth of 7.0% in the previous decade. Growth in China is set to slow sharply while India’s economy will likely contract in 2020. And it’s not just emerging economies in the region that are experiencing economic weakness; advanced economies like Japan and South Korea are also expected to contract (figure 1). Although growth may pick up in 2021, the scenario is still uncertain, and much depends on the trajectory of the pandemic.

Lockdown and reopening: A tale of two woes

To thwart the spread of COVID-19, many economies were quick to enforce lockdowns and social-distancing measures, but these all but halted a large share of economic activity. Over the past few months, economies have begun to reopen, with varying degrees of social-distancing measures still

in place—and with mixed country-level experiences. Regardless, people remain worried about their well-being,6 thwarting a return to prepandemic levels of activity.

PHASE 1, LOCKDOWNS AND SOCIAL DISTANCINGChina enforced lockdowns mostly in Q1 2020 and India in mid-March and extended them till early June. Expectedly, consumer spending fell sharply. In China, retail sales fell 19.6% year over year7 in the first quarter compared to an 8.3% rise in the same period a year before. In South Korea, sales fell 3.3% in March when daily new cases of the virus peaked. Spending on nonessential items and in establishments where social distancing is difficult was hit the hardest. A good example is sales at restaurants and bars. In Hong Kong,8 business receipts in food services fell by 31.2% in Q1, while in Singapore, where cases rose again in April and May, the index for food and beverage services fell by 51.9% on average.

As for manufacturing activity in China—as measured by the purchasing managers’ index (PMI)9—it fell sharply in February before bouncing back in March (figure 2). India and Indonesia were

FIGURE 2

Manufacturing suffered due to lockdowns and social distancing measures

Note: A PMI reading above 50 denotes growth and one below 50 denotes contraction.Sources: IHS Markit (sourced through Haver Analytics); Deloitte Services LP economic analysis.

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China India Indonesia ThailandVietnam Japan South Korea

Manufacturing PMI

20

30

40

50

60

Nov-2019 Dec-2019 Jan-2020 Feb-2020 Mar-2020 Apr-2020 May-2020 Jul-2020Jun-2020

Asia’s economic recovery: Staggering along in an uncertain world

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affected most in April and May, while in Japan, where strong restrictions were in place from mid-April to mid-May, the steepest decline in manufacturing activity was in May.

For economies in South Asia and Southeast Asia that have large tourism sectors, the pandemic and continuing restrictions on travel have meant that tourism incomes have dried up. In Thailand, international tourist arrivals dropped 42.8% in February, 76.4% in March, and then fell to zero in April and May. The trend is similar for other key tourist destinations in the region (figure 3). Smaller and less-diversified economies, such as the Maldives and even Sri Lanka, seem set for a bigger impact on growth. For example, with tourism

interlinked—directly and indirectly—to nearly two-thirds of the Maldivian economy, the jolt to the sector this year will likely result in strong GDP contraction.10

Air travel too has suffered a lot due to travel-related restrictions, which continue to be in force in many countries. Passenger movements at Changi Airport, Singapore, fell by 99.5% in April and May.11 Other air travel hubs like Hong Kong and Kuala Lumpur, Malaysia, show similar declines in passenger traffic.12 According to the International Air Transport Association, passenger traffic for Asia-Pacific airlines is forecasted to fall 53.8% in 2020, thereby leading to a 27.5% fall in revenues.13

Notes: NSA stands for nonseasonally adjusted. For Hong Kong, the data is released as “visitor arrivals.” Sources: Haver Analytics; Deloitte Services LP economic analysis.

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FIGURE 3

Flow of international tourists has ground to a halt in key tourist destinations in Asia

0

1

2

3

4

5

6

7

8

Tourist arrivals (NSA, million)

Hong Kong South Korea Singapore Thailand

Jan-2019 May-2019 Sep-2019 Jan-2020 May-2020

Asia’s economic recovery: Staggering along in an uncertain world

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PHASE 2, UNLOCKING AND THE ABSENT V-SHAPED RECOVERYRemoving lockdowns didn’t result in a swift move back to pre-COVID-19 levels of economic activity. There are three reasons for this. First, some

“unlocked” economies still have a high number of cases. In India, for example, new cases averaged over 35,000 per day in July. This means that although the economy isn’t in lockdown, social distancing regulations are still in place, including local lockdowns and reduced capacity in offices and business establishments. Second, even where countrywide virus cases have dropped, local virus clusters are still cropping up. For example, in June, there were fears of a cluster in Beijing, China, and small clusters emerged around Seoul, South

Korea.14 Consequently, social-distancing measures are still in place. Last, but not least, no cure or vaccine has been found as of the writing of this article. So, even as economies open, people and governments are being cautious. Restrictions on large gatherings and travel are still in force in countries while people limit their movements for fear of catching the virus.

Given this situation, key sectors continue to lag. Manufacturing has rebounded in some countries but remains below pre-COVID-19 levels (figure 2). Meanwhile, consumers are still holding on to their purse strings. Retail sales, for example, may have rebounded a bit in South Korea and Vietnam, but the dip in sales continues for others. Similar

Notes: NSA stands for nonseasonally adjusted. Sources: Haver Analytics; Deloitte Services LP economic analysis.

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FIGURE 4

Weakness in retail sales reveals that consumers are not spending as much as they used to

Retail sales growth (%, NSA, YoY)

Hong KongSouth Korea SingaporeChinaVietnam

Japan

–60

–50

–40

–30

–20

–10

0

10

20

Jan-2019 May-2019 Sep-2019 Jan-2020 May-2020

Asia’s economic recovery: Staggering along in an uncertain world

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trends in key markets outside Asia means that Asian exporters continue to feel the pain of weak external demand (figure 5).

Interestingly, although economies are slowly picking up the pieces, not much has changed for tourism and aviation. Travel restrictions, especially those on international travel, remain. It is also unlikely that people will flock for vacations within their country given risks from the virus itself.

Stimulus in the time of uncertainty: It’s a slippery slopeWhile Asian economies are expected to continue recovering, the recoveries are unlikely to be fast or complete until better treatments or a vaccine makes its way to a large share of the region’s (and the world’s) population. Even in China, for

example, where the virus is relatively more in control, a return to growth in Q2 is welcome news, but the 3.2% rise is far lower than the 6.2% expansion in the same period a year before. Unfortunately, as of writing this report, there is no approved vaccine although there are several ongoing trials around the world.15 Even if a vaccine is found eventually, ensuring its supply and delivery will take time, especially in countries with large populations, such as China and India.

In such a scenario, there is a limit to how much governments can do—or achieve. While fiscal authorities and central banks have been quick to support economic activity in the short term, a decision on whether to continue doing so and to what degree will depend on prevailing fiscal conditions and the need to hold firepower for later if the pandemic continues. Emerging economies in the region will also be wary of stress on sovereign ratings from any fiscal deterioration and its impact

Notes: Value of Japan’s merchandise exports is in yen. For the others, it is in US dollars. Sources: Haver Analytics; Deloitte Services LP economic analysis.

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FIGURE 5

Sluggish external demand and disrupted supply chains have hit Asia’s exports Japan India Taiwan South Korea China

Merchandise exports growth (%, seasonally adjusted, YoY)

Jan-2019 May-2019 Sep-2019 Jan-2020 May-2020–70

–60

–50

–40

–30

–20

–10

0

10

20

Asia’s economic recovery: Staggering along in an uncertain world

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on their currencies. And any attempt at credit-fueled consumption will likely not be effective if people remain anxious about the virus. Also, funneling too much credit into the economy may lead to deteriorating debt levels, as happened to many countries after the global downturn of 2008–2009.16 In China, for example, overall debt surged to 317% of GDP in Q1 2020 from 172% back in 2008.17 Central banks will also likely be wary of a rise in business bankruptcies if economic growth doesn’t revive fast.18 Such bankruptcies will worsen the burden on countries already dealing with high nonperforming assets, such as India.19 Interestingly, if travel restrictions and social-distancing requirements continue, sectors such as food

services, tourism, and aviation are at a higher risk of bankruptcy. Given that sectors such as tourism are labor-intensive,20 any rise in insolvencies there may lead to higher unemployment, poverty, and income inequality in some economies.21

A possible double whammy could be any escalation in restrictive trade and investment practices. To this end, Asian policymakers will be hoping that rules of global trade and finance outdo the protectionist rhetoric in many parts of the world,22 and that the pandemic itself enables more global cooperation to race to find a vaccine or better treatments. That would be one gift that the region and the world can do with.

Asia’s economic recovery: Staggering along in an uncertain world

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1. Haver Analytics, sourced August 10, 2020. Unless otherwise stated, all economic data is sourced from Haver Analytics.

2. Johns Hopkins University & Medicine, “Coronavirus resource center,” accessed August 10, 2020. All COVID-19-related data is sourced from this site, unless otherwise stated.

3. World Health Organization, “Rolling updates on coronavirus disease (COVID-19),” accessed July 13, 2020.

4. International Monetary Fund, World Economic Outlook, sourced from Haver Analytics on July 13, 2020. All data in this section is sourced from the IMF.

5. IMF’s classification of different country aggregates such as emerging and developing economies and advanced economies is based on per-capita incomes, export diversification, and degree of integration into the global finan-cial system. For more details, see International Monetary Fund, “Country composition of WEO groups,” accessed July 13, 2020.

6. Deloitte, “Global anxiety index,” accessed July 13, 2020.

7. All growth figures are year over year, unless otherwise stated.

8. Hong Kong is a specially administered region of China. For this article, we analyze trends in Hong Kong separately from the rest of China.

9. IHS Markit, sourced through Haver Analytics on August 10, 2020. All PMI data has the same source.

10. The World Bank, “The World Bank in Maldives: Overview,” accessed June 13, 2020; Asian Development Bank, “Maldives and ADB: Economic indicators for Maldives,” accessed June 13, 2020.

11. Changi Airport Group, “Passenger movement: Monthly breakdown,” accessed July 13, 2020.

12. Hong Kong International Airport, “Air traffic statistics,” accessed July 13, 2020.

13. The International Air Transport Association, “Industry statistics: Fact sheet (June 2020),” accessed July 13, 2020.

14. Evelyn Cheng, “Sudden, new coronavirus cluster in Beijing points to growth challenges ahead for China,” CNBC, June 16, 2020; Hyonhee Shin, “South Korea urges staggered vacations, warns against gatherings as coronavirus cases rise,” Reuters, June 29, 2020.

15. World Health Organization, “Global research on coronavirus disease (COVID-19),” accessed July 13, 2020.

16. M. Ayhan Kose et al., “Finance and development: Caught by a cresting debt wave,” International Monetary Fund, June 2020.

17. Institute of International Finance, “Surging global debt: What’s owed to China (IIF weekly insight),” May 14, 2020.

18. The World Bank, “The global economic outlook during the COVID-19 pandemic: A changed world,” June 8, 2020.

19. Atmadip Ray, “Pandemic may lead to higher NPAs, banks need more capital buffers against shocks: RBI gover-nor,” Economic Times, July 11, 2020.

20. Louise Twining-Ward and Damien Shields, “20 reasons you should integrate tourism into your development agenda,” World Bank Blogs, September 27, 2017.

21. Dr. Patricia Buckley and Akrur Barua, COVID-19’s impact on US income inequality: It’s going to get worse before it gets better, Deloitte Insights, July 23, 2020.

22. Andrea Shalal, “IMF chief warns full global economic recovery unlikely in 2021,” Reuters, May 18, 2020; Aaditya Mattoo and Michele Ruta, “Viral protectionism in the time of coronavirus,” World Bank Blogs, March 27, 2020.

Endnotes

Asia’s economic recovery: Staggering along in an uncertain world

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Akrur Barua | abarua@deloitte.com

Akrur Barua is an economist with the Research & Insights team. As a regular contributor to several Deloitte Insights publications, he often writes on emerging economies and macroeconomic trends that have global implications like monetary policy, real estate cycles, household leverage, and trade. He also studies the US economy, especially demographics, labor market, and consumers.

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Patricia BuckleyDirector | Deloitte Services LP+1 571 814 6508 | pabuckley@deloitte.com

Patricia Buckley, Deloitte Services LP, is the managing director for Economics responsible for contributing to Deloitte’s Eminence practice with a focus on economic policy.

Akrur BaruaUS economics | Deloitte InsightsManager | Deloitte Services India Pvt. Ltd+1 678 299 9766 | abarua@deloitte.com

Akrur Barua is an economist with the Research & Insights team.

The author would like to thank Dr. Patricia Buckley, US Economics, and Dr. Ira Kalish, chief global economist DTTL, for their reviews. The author would also like to thank Monali Samaddar from the Economics team for her research contributions for this article.

Acknowledgments

Asia’s economic recovery: Staggering along in an uncertain world

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