Antai Insight


Qian Junhui:A Global Recession Looms on the Horizon in 2020

校友与发展联络办公室 2020-05-11

China's real GDP is expected to register a negative growth in the first quarter this year, the first time ever since the initial release of official quarterly statistics in the 1990s. From Japan and South Korea, to those in Europe and America, no country, whether developed or developing, can be spared such fate. A global recession looms on the horizon in 2020.

The undergoing economic impact of China's "battle against virus" will recur in other countries, as any responsible government has to contain the pandemic at the expense of some economic interests.

The pandemic already poses too much for the international financial market to deal with, with S&P 500 index plummeting by a sharp 11.5% in the last week of February alone, whereas the author thinks it is just the beginning.  The past decade of global easing has culminated in too many risk assets purchased by institutions incapable of risk-taking and too many debts borrowed by ineligible enterprises. Debts require steady cash flows, and the higher the leverage, the higher the requirement for such stability of cash flows.  COVID-19 drags economies into a standstill with cash flows shrinking sharply. 

Another global financial crisis would directly cast the economy into recession:  a plunge in investment and consumption, caused by a slump in asset prices as well as aggravated by contracting business revenues along with lower employment and household incomes, would fuel a vicious circle.

Now comes the impact of the pandemic on the real economy, to be incurred by other economies based on inference from what China has undergone since Wuhan imposed “lockdown” on January 23rd as the start of economic impact.

Some impacts on China are avoidable, like traffic restrictions that have driven farm owners to despair, while many other impacts are inevitable even in other countries, such as the shutdown of restaurants, cinemas, barbershops and other living and entertainment facilities, with travelling, conferences, fairs and sales cancelled.

The service sector is not the only victim of the impact. With a large number of workers stranded in Hubei Province, many factories there and those in other provinces and cities fail to resume normal operation, where workers are also subject to various restrictions on returning to work or obtaining a work resumption permit.

Restoration of 95% of capacity in 95% of enterprises does not necessarily mean the revival of the supply chain, as determined by how modern manufacturing functions. Failure by any producer of any critical component to resume normal operation would lead to a supply chain jam, wreaking havoc upon manufacturing both in China and the world at large, as shutdown of upstream enterprises in large manufacturing nations like South Korea, Japan and Germany amidst the pandemic outbreak would deal a fatal blow to the global industries, including manufacturing in China.

The economic impact of COVID-19 pandemic has, so to speak, exceeded expectations in two aspects. First, its duration of impact. The impact was expected by the market to be transient with a maximum of a prolonged "Chinese New Year" holiday and a V-shaped rebound in the wake of the pandemic. Yet despite the government’s request for resumption of work and production in various places, real resumption rate has been far lower than officially announced due to shortages of labor, raw materials and protective equipment for over 40 days after the Chinese New Year.

Such a longer-than-expected "Chinese New Year" caught the world off guard because of minimal inventory championed by modern manufacturing. Hyundai suspended several assembly plants in South Korea in early February due to the shortage of parts, according to Caijing News. Apple in USA also announced an expected failure to meet its sales target for Q1 this year because of an interrupted supply of chips made in China. Chinese companies also rely on supplies of foreign parts. Failure to resume normal operation by Chinese companies would in turn put a damper on demand for foreign part makers. 

Second, its range of outbreak beyond expectation. It is a global pandemic that we are coping with. There is time lag both in the spread of and countries' response to the virus. So is the case with the impact of the pandemic upon local economies, which further prolongs the "long holiday" in the global manufacturing sector, where all countries serve as integral players along the same global industrial chain. 

In other words, China still has to await the recovery in the global supply chain and demand before a V-shaped rebound is achieved even when it succeeds in epidemic control domestically. Many orders, once undelivered due to the pandemic, would be gone forever. Buyers may have either shifted suppliers or collapsed. 

Not everyone can afford to enjoy the prolonged "Chinese New Year", as many companies, including large ones like SAIC Motor, have already slashed wages, while abroad, British regional airline Flybe is on the verge of bankruptcy, with over 2,000 jobs affected. However, it is just a prelude to an imminent global "bankruptcy wave". 

Some suggest that the government require enterprises to retain staff and wages, but this simply transfers the burden to enterprises, as all jobs are gone once enterprises collapse. 

In the service sector, no work means no income, let alone a sick leave or isolation, as quite a few people earn their bread through piece- or timework.  According to the Wall Street Journal, 33.6 million people in the US don't enjoy "paid sick leave". Therefore, one can either keep working or starve at home. 

In this regard, Chinese people have a better propensity for savings and therefore are better poised to weather the storm than American families.  According to a survey, 40% of American adults can not afford an unexpected expense of $400. As the pandemic escalates, people no longer take flight or go to restaurant, then middle-aged flight attendants and restaurant attendants without income will soon become unable to pay their mortgages or credit card bills, thus confirming gloomy expectations of financial markets. 

Neither the Federal Reserve nor other central banks can do anything about it. Interest cuts can't get people to go to restaurant, travel on cruise, reduce interest rates on credit card loans, or assist anyone without income in paying off their debts. The point is that COVID-19 pandemic is merely a catalyst rather than the only culprit for a global recession. As early as last year, the US interest rate curve was turned upside down, indicating an imminent recession. The global economy feels the pinch not only from the pandemic and the lingering trade war, but also the deeper and longer-cycle contraction of aggregate demand. Europe and America are following Japan's footsteps into an aging society, as "baby boomers" start to retire en masse, with quite a number of them failing to maintain their pre-retirement consumption level due to pension problems. Unlike their predecessors or successors, they are a generation of champion consumers. 

With fiscal policies politically constrained in those countries, monetary policies turn out to be the only instrument at their disposal. Yet monetary easing can neither rejuvenate baby boomers by 20 years, nor assist millenials in paying off student loans or credit card bills. Protracted low interest rates have made life even harder for baby boomers as their savings bear little interest. 

The author projects that even if the pandemic is completely over in Q2, the recovery in the world economy could be both short-lived and weak without any V-shaped rebound, given a longer cycle of shrinking demand and a lack of national policy instruments. 

China's economy is still believed to be one of the best performers in the world after the pandemic, but it can no longer sustain a high growth trajectory as it did in the past. It's believed there will be no large-scale economic stimulus given the lesson drawn from the previous "4-trillion stimulus plan". Everyone has to get used to a slower growth of 3% to 5%.