INSIGHT: Recession feared in some Asian economies amid China epidemic

SINGAPORE (ICIS)–Japan appears to be on the brink of a recession; Singapore might just tip into one; while South Korea is in an emergency situation amid the novel coronavirus epidemic, which has been pummeling the Chinese economy already weakened by nearly two years of trade war with the US.

The three Asian countries, which have industrialised and export-oriented economies, have the highest cases of coronavirus infection outside China.

“The coronavirus is our most pressing uncertainty: a global health emergency we did not anticipate in January. It is a stark reminder of how a fragile recovery could be threatened by unforeseen events,” International Monetary Fund (IMF) managing director Kristalina Georgieva said in her blog.

Barely a month since the partial US-China trade deal, China’s massive manufacturing sector is facing a bigger threat as the country struggles to contain the rapid spread of the flu-like virus across the country, which could also knock over an erstwhile strong services segment of the economy.

Measures so far taken in China to stem the outbreak, including the extended week-long Lunar New Year holiday and severe restrictions on domestic transportation, have disrupted the global supply chain as the world’s second-biggest economy also serves as the world’s factory.

Apart from a major driver of global demand, China is also a key supplier of raw materials to the rest of the world.

Factories in China were slow to resume production after an extended Lunar New Year holiday due to manpower shortage, which was also at the root of logistics problems that hampered trades and delivery of cargoes.

JAPAN ECONOMY CONTRACTS
Japan, the world’s third-biggest economy, posted an annualised GDP contraction of 6.3% in the December quarter, marking the sharpest decline in six years.

Its export-oriented economy was heavily hit by the US-China trade war throughout 2019, with added strain from a two-percentage point hike in sales tax to 10% in October. On a quarter-on-quarter basis, the economy shrank 1.6%.

Economists are projecting another contraction in the first three months of 2020, plunging Japan into a technical recession as it deals with growing cases of coronavirus infections.

Based on a survey of 35 forecasters by the Japan Center for Economic Research, the economy will shrink by 4.05% year on year in January-March 2020, and continue to contract in the next quarter.

Manufacturing data in the first two months of the year indicated continued deterioration in business conditions, with the February purchasing managers’ index (PMI) reading by au Jibun Bank at 47.6, down from 48.8 in January.

A PMI number 50 indicates contraction.

Exports data at the start of the year were in the red, posting declines for the 14th month in January.

Its tourism industry is expected to take a heavy hit from the outbreak. Tourist arrivals in January declined 1.1% year on year to 2.66m, with Chinese tourists accounting for about 35% or 924,800 of the total, official data showed.

Japan has one of the biggest number of confirmed coronavirus cases outside of China, at 94, with one death, not including the infected passengers of cruise ship Princess Diamond moored near Tokyo.

The ship has 634 confirmed cases with two deaths.

SINGAPORE RECESSION NOT RULED OUT
For 2020, the Singapore government is including a total of Singapore dollar (S$) 6.4bn ($4.6bn) in its budget to weather the economic impact of the coronavirus outbreak.

Singapore Prime Minister Lee Hsien Loong had said that a recession is a possibility for the economy, which posted a 2019 growth of 0.7% – its slowest pace of expansion since the financial crisis of 2008.

The epidemic will hit exports and tourism – the major growth engines of the city state – as well as domestic consumption.

The low end of the revised 2020 GDP growth forecast for Singapore points to an economic contraction of 0.5%, with the high end lowered to 1.5% from 2.5% previously, as it deals with growing cases of infections.

Singapore has 82 confirmed cases of the virus as of 19 February.

SOUTH KOREA RECOVERY INTERRUPTED
The South Korean economy has been battered by the US-China trade war in 2019, with GDP growth hitting a 10-year low of 2.0% due to sharp declines in exports.

Data in the last three months of last year indicated some improvement as growth on a quarter-on-quarter basis accelerated to 1.2% from 0.4% in the September quarter, but the recovery momentum would be interrupted.

A number of economists were still projecting higher 2020 GDP growth compared with 2019, but the forecasts were revised down from previous projections taking into account the impact of the coronavirus outbreak.

The full extent of the economic drag of the flu-like epidemic on the economy has yet to be known.

Exports were off to a weak start in 2020, logging a 6.1% year-on-year decline to $43.4bn in January.

Outbound shipments have contracting since late 2018, largely due to weakness in China, which accounts for about a quarter of South Korea’s total exports.

Supply chain disruptions as China took measures in late January 2020 to contain the coronavirus outbreak have hit South Korea’s domestic auto production due to problems in securing parts from China.

South Korea President Moon Jae-in had said that the economy is in an emergency situation, as he called for all-out efforts to cushion it from the impact of the outbreak.

The number of confirmed infection in the country spiked to 156, majority of which are in the southern city of Daegu.

Among possible measures to stimulate the economy is a policy interest rate cut by the Bank of Korea (BoK) on 27 February.

The Korean government also “plans to support Korean exporters to China and companies with production bases in China facing difficulties from the spread of the coronavirus, and put forth all efforts to respond to any disruptions it might cause to the global supply chain”, according to its Ministry of Trade, Industry and Energy (MOTIE).

ALL EYES ON CHINA
China is slowly ramping up production after a prolonged holiday borne of efforts to contain the coronavirus outbreak, which has so far killed more than 2,000 and infected over 74,000 in the country alone, mostly in the central Hubei province.

More than 80% of the country’s 20,000 manufacturing companies under 96 state-owned enterprises (SME) have resumed production as of mid-February, according to official data.

The Lunar New Year holiday was extended for businesses by at least 10 days from 30 January, depending on provinces.

In Hubei, where Wuhan – the epicentre of the outbreak – is located, general businesses will not restart until 11 March.

As of 20 February, the death toll from the flu-like epidemic in China stood at 2,236 to date, with 75,465 infected.

Hubei has a 96% share of the total fatalities at 2,144 and 83% of the total infections at 62,662, according to data from China’s National Health Commission.

Resuming operations for most businesses and logistics services are being impeded by lack of manpower amid travel restrictions, which are gradually being lifted.

The novel coronavirus outbreak is believed to have emerged late last year in Wuhan, capital of Hubei, and has since spread to more than 20 other countries and regions.

China’s central bank issued on 20 February a 10-basis point cut in its key lending rate to 4.05% – the latest of efforts to flush the economy with liquidity as cushion against adverse impact of the outbreak.

The prolonged production stoppage, as well as hits to the services sector as overall consumption slows down, will cause China’s economy to sputter and post a much lower GDP growth of 3-4% in the first quarter, according to some economists.

Full-year growth is largely expected to come in below the 6.1% pace recorded in 2019, which was weakest in nearly 30 years.

Concerns about reduced demand from the world’s biggest oil importer have been weighing down on crude prices since the start of the year.

“If the disruptions from the virus end quickly, we expect the Chinese economy to bounce back soon. The result would be a sharp drop in GDP growth in China in the first quarter of 2020, but only a small reduction for the entire year,” IMF’s Georgiva said.

“However, a long-lasting and more severe outbreak would result in a sharper and more protracted growth slowdown in China. Its global impact would be amplified through more substantial supply chain disruptions and a more persistent drop in investor confidence, especially if the epidemic spreads beyond China,” she said in her blog.

“Even in the best-case scenarios, however, the projected rate of global growth is still modest in too many parts of the world.”

How fast can the giant economy bounce back from this coronavirus-induced slowdown will dictate the pace of recovery in Asia’s industrialised economies.

Still to recover from a recent bout of affliction that is the US-China trade war, these economies require an immediate and increased dose of cash injections to withstand the epidemic.

Additional reporting by Nurluqman Suratman

Insight article by Pearl Bantillo

(Workers perform disinfection at the workshop for medical N95 masks at a mask production company in southwest China’s Chongqing. Photo by CHINE NOUVELLE/SIPA/Shutterstock)

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