Photo: Bloomberg Photo By Wei Leng Tay.
The world economy is entering a new stage of the coronavirus crisis as governments inch toward easing restrictions.
It’s a phase that entails stark trade-offs between economic growth and risking another wave of infections and death.
Some countries, like China and South Korea, are firing up their economic engines already, having contained the virus — for now at least. Others, including hard-hit Italy and the U.S., are preparing to reopen their wounded economies even as they still fight to get a lid on infections.
It’s clear that the longer the lockdowns endure, the steeper the economic blow. But China’s experience demonstrates reopening won’t happen overnight — March data showed production was recovering but consumers remain wary.
Meantime, Singapore presents a cautionary tale for those reopening — it’s seen a second wave that’s prompted stricter and extended restrictions, with an accompanying deeper blow to the island economy anticipated.
In a new study released on Thursday, Bloomberg Economics concluded Germany and South Korea are showing resilience, while Italy and Brazil are performing less well.
Here’s a look at where some economies are at on the reopening curve:
– First movers. In China, the lifting on April 8 of the unprecedented lockdown on Wuhan — where the virus pathogen first emerged — was a milestone. Stringent nationwide restrictions meant the world’s second-largest economy recorded its deepest contraction in decades over the first quarter. Even now, companies and workers in the central Chinese city continue to undergo daily temperature checks and disinfection of facilities. Malls have reopened but with much fewer shoppers than the pre-virus days and suspicions remain about the true scale of the epidemic. The faster-than-anticipated resumption prompted Bloomberg Economics to increase its GDP growth forecasts for China to an expansion this year of 2%, up from 1.4% in its previous forecast, yet far below the actual growth rate of 6.1% in 2019.
South Korea curbed the virus without a full-fledged lockdown due to its aggressive testing and tracing efforts, which pioneered drive-in centers and phone stalls for testing. That approach has softened the economic hit even as external demand has slumped. Bloomberg Economics projects Korea’s economy will contract 0.1% year on year in 2020 in their base case, and bounce back with a 3.3% expansion in 2021.
– Next in line. Germany’s most stringent measures started later but finished sooner, which is setting the economy up for a faster recovery than its peers, according to Bloomberg Economics. “Add in a large dose of fiscal support and it looks as if the euro area’s largest economy will do better than most.” Still, they expect Germany’s economy to shrink by more than 5% in 2020.
– Planning to reopen. Italy is mulling how to ease a shutdown that since its imposition early March has brought the euro area’s third-biggest economy to a near standstill. An initial reopening of businesses is planned for May 4. Bloomberg Economics’ base case has Italy’s economy contracting by 8.9% in the first quarter and 18.2% in the second quarter, while annual GDP is set to shrink 13.2% in 2020.
In a stark illustration of the trade offs involved for policy makers across the globe, a recent study by some Italian economists found that in the Lombardy region around Milan — Italy’s economic heartland and its hardest-hit area — reopening gradually may limit additional deaths to about 5,000 over a year. A full reopening would mean no further loss in gross domestic product, but would cost more than 40,000 lives. Keeping the lockdown in full force would drastically reduce fatalities, but risks a 26% drop in GDP in the next year.
In the U.S., the lockdown has precipitated a record-breaking economic crash that’s pressured President Donald Trump to unveil guidelines for when states can open their economies. Some states have already eased restrictions, but it won’t be enough to jump-start the economy. Baseline projections from Bloomberg Economics show real GDP will dive from -5% in the first quarter toward a 37% contraction in the second. A second-half rebound averaging 12% will leave U.S. growth deep in negative territory for the year.
A stringent lockdown in the U.K. has forced a quarter of businesses to stop trading and the government is currently protecting 4 million jobs as part of a furlough program. Retail sales have matched a record slump last seen in December 2008. Assuming that the lockdown lasts until the middle of May, output will probably fall by around 5% in the first quarter and by 15% in the second, according to the National Institute of Economic and Social Research.
– Second wave. Singapore initially pursued less stringent restrictions but is now seeing a subsequent wave of infections. That’s forced the country to extend its version of a lockdown until June 1 including keeping schools shut, closing non-essential businesses and confining migrant workers to their dormitories, the source of a significant cluster. As a result, Singapore’s government is bracing for a sharper economic contraction this year than an earlier forecast for a slump of as much as 4%.
Japan is weighing the need to extend the country’s state of emergency, balancing a fall in new cases with fears that easing the order might fuel the outbreak, which remains small compared to the U.S. and parts of Europe. But Japan’s economy was already in decline before the crisis. “A relatively limited virus outbreak — allowing for milder containment measures — suggests the drop in second quarter GDP may be less severe relative to other major advanced economies,” according to Bloomberg Economics. “Still, we see output falling 4% in 2020, even under our optimistic baseline scenario.”
– Outliers. Vietnam flattened its infection curve and has seen no deaths under a draconian quarantine regime that it’s now starting to ease. New Zealand, which adopted a virus elimination strategy, has eased some restrictions after almost five weeks of strict lockdown, imposed before they’d even recorded a death. New infections across Australia are slowing to a trickle and its states are gradually easing restrictions. Still, the lockdown curtailed activity enough that Bloomberg Economics is tipping three consecutive quarters of declining GDP with the economy contracting by 9% from the fourth quarter of 2019.
– Never shut. Among developed economies, Sweden has stood out for its more relaxed approach to fighting the virus. Schools, gyms, cafes, bars and shops have stayed open. The approach hasn’t been enough to a avert a recession, though, as the government expects 2020 GDP to shrink by 4.2% to 10% in 2020, while confidence levels hit record lows in April.
Bloomberg Economics estimates a $6 trillion hit to global growth from the virus and the lockdowns it has triggered. But that’s an optimistic scenario, and one that depends on how quickly economies can get moving again. It remains to be seen whether reopening the global economy will reduce the economic pain, or end up worsening it.
Less restrictive virus mitigation strategies “could benefit recoveries by building herd immunity more quickly while limiting economic damage compared to economies with longer-lasting lockdowns,” JPMorgan Chase economists led by Bruce Kasman wrote in a recent note. “Alternatively, it could significantly increase fatalities and overwhelm health care systems, resulting in greater economic damage.”