20 Mar Recovery from coronavirus-driven downturn in Asia Pacific depends on pent-up consumer demand
A recession in Asia Pacific looks certain as economic activity plummets due to lockdowns meant to slow the coronavirus pandemic, but analysts say the recovery will be driven by pent-up demand.
A recession “is now guaranteed” for the region, ratings giant S&P Global said in a report Wednesday.
It projected that growth across the region will now fall by more than half, to less than 3%. It defined recession as at least two quarters of well below-trend growth sufficient to trigger rising unemployment.
“A recession across Asia-Pacific is now guaranteed due to a deep first-quarter shock in China and the shutdown of activities across G7 economies,” S&P Global’s economists Shaun Roache and Vishrut Rana wrote.
On Sunday, the Fed slashed interest rates to near-zero and announced a $750 billion asset-purchasing program to shelter the economy from the impact of the virus. Despite that, the markets crashed Monday — with the Dow suffering its worst day since the “Black Monday” market crash in 1987 and its third-worst day ever.
But Robin Brooks, managing director and chief economist at the Institute of International Finance, said ultimately this isn’t a financial crisis and markets will bottom once uncertainty around the extent of the spread in the U.S. is removed.
“The underlying shock isn’t subprime, it isn’t pockets of excess leverage … this isn’t a financial crisis. This is a public health crisis … it’s about consumers scaling back spending sharply in response,” he told CNBC on Wednesday. The subprime mortgage crisis around 2007 led to a severe recession till 2009.
Brooks said what’s needed is a grasp on coronavirus testing in the U.S., which had been hampered by delays and a restrictive diagnostic criteria that limited who could get tested.
“Once markets know how bad the problem is in terms of contagion, and how many people are infected, I think frankly that will be the bottom,” Brooks added.
Analysts were divided over how fast economies will recover from the downturn. However, the consensus was that it would depend on how well the pandemic can be contained.
“The severity and duration of Covid-19 are key,” Morgan Stanley economists wrote in a report on Wednesday.
They suggested that the recovery could be more gradual, as the global spread of the virus means monetary easing “would not be able to provide a full safety net” for corporate profitability and jobs.
“If more companies shut down or lay off workers, growth will take longer to recover even when Covid-19 passes,” Morgan Stanley wrote.
But all that bottled-up consumer demand will ultimately come roaring back, analysts say.
“Consumption is being turned down very significantly and if the virus abates by the summer … then consumption should come back,” Brooks said. “I do think, for example travel … I think there will be a catch up effect … and there is good reason to expect some kind of a bounce … Hopefully this virus burns itself out by the end of Q2.”
But S&P Global cautioned that the boost form the release of pent-up demand would be diluted if authorities don’t contain the virus spread effectively.
“Even if major progress is made during the second quarter, after a sustained period of stressed cash flow many firms will be in no position to resume investing quickly. Households that have either lost their jobs or have worked fewer hours will spend less,” it said.
“There will be pent-up demand but the longer the crisis drags on, the weaker it will be,” the ratings firm concluded.