The IMF’s Chang Yong Rhee argues that Asia’s growth is projected to contract by 1.6% in 2020 due to weaker global conditions and more protracted lockdown measures in several emerging economies. Since Asia is heavily dependent on global supply chains, a slowdown in global economy would automatically slow the region too. Assuming that there is no second wave of infections and with the ongoing unprecedented policy stimulus to support recovery (especially private demand), the IMF projects growth to rebound to 6.6% in 2021. Still, output will be 5% lower compared to pre-COVID-19 projections.
However, this outlook may be optimistic due to:
- Slower growth in trade as supply chains continue to be affected (reorienting Asia’s growth model towards domestic demand and reducing its reliance on exports may take time)
- Protracted lockdowns (physical distancing to reduce contagion will depress economic activity)
- Rise in inequality (past pandemics led to higher income inequality and lower employment prospects for less educated population) as informal sector workers get hit
- Weak household and corporate balance sheets (negatively affect investor sentiment or amplify uncertainties)
Significant fiscal and monetary policy support is helpful, but they may not last long as a potential correction of the disconnect between financial markets and the real economy could exacerbate the already high borrowing costs for many Asian economies. A close coordination between monetary and fiscal policy measures (to support liquidity and demand); resource reallocation (streamlining the restructuring and insolvency frameworks, adequately capitalized banks, and facilitation of equity injections into viable firms and risk capital for new firms); and addressing inequalities (enhancing access to health and basic services, social safety nets, informality, etc) may be some policy options to respond to the emerging crisis.
Meanwhile, Gita Gopinath argues that “in the absence of a medical solution, the strength of economic recovery is highly uncertain and the impact on sectors and countries uneven”. Many countries are reopening amidst a surge of cases. The June edition of WEO sharply downgraded global output growth forecast to -4.9% in 2020 followed by a partial recovery with growth at 5.4% in 2021. In absolute terms, the cumulative loss to the global economy comes to be around $12 trillion over two years. Upside risks to the forecast include availability of vaccines and treatments, and additional policy support. Downside risks to the forecast include further waves of infections (which could reverse mobility and spending), and rapidly tightening financial conditions (which could trigger debt distress). Geopolitical and trade tensions could further affect growth outlook.
The crisis is affecting export-dependent economies and jeopardizing prospects for income convergence. The staggered reopening of economies has also meant that the pick-up in activity is uneven. Some sectors have seen a surge in spending due to pent-up demand (retail), but contact-intensive services remain depressed. Lower-income and semi-skilled workers are particularly affected as work from home norms do not apply fully to them.
Fiscal and monetary policy support has helped to check the downturn to some extent.
- Advanced economies have a larger fiscal space, so they rolled out larger fiscal packages.
- Emerging market and developing economies are somewhat constrained by fiscal space.
- The IMF estimates that global fiscal support is over $10 trillion in addition to accommodative monetary policy measures such as interest rate cuts, liquidity injections, and asset purchases.
- The strong backing by central banks have contributed to rebounding of equity prices, narrowing of credit spreads, stabilization of portfolio flows to emerging and developing economies, and strengthening of currencies that sharply depreciated previously.
These support measures may have to continued in the near future too. However, the IMF recommends countries to ensure proper fiscal accounting and transparency, and to keep independence of monetary policy intact.
- The first priority is to respond to the health crisis through building health capacity, widespread testing, tracing, isolation and practicing safe distancing.
- Affected people should be provided with unemployment insurance, wage subsidies, cash transfers.
- Affected businesses should be provided with tax deferrals, loans, credit guarantees, and grants.
- Digital payments will be helpful.
Over the medium-term, policy support should facilitate reallocation of workers to sectors with growing demand and away from shrinking sectors. This could require worker training and hiring subsidies. Policies should also be designed to repair balance sheets and address debt overhangs (requires strong insolvency frameworks, and mechanisms for restructuring and disposing of distressed debt). Economies could also increase green public investment, and expand social safety net spending.
The international community can support developing countries through concessional financing, debt relief and grants. Emerging market and developing economies could require larger access to international liquidity (through central bank swap lines, global financial safety net, and ensuring financial market stability). Since public debt is projected to shoot up, economies will need to roll out sound fiscal frameworks for medium-term consolidation (cutting back on wasteful spending, widening tax base, minimizing tax avoidance, and progressive tax system).
