Asia to See Lowest Growth in Sixty Years

Growth in Asia Pacific is expected to stall at zero percent in 2020. This is the worst growth performance in almost 60 years, including during the Global Financial Crisis (4.7 percent) and the Asian Financial Crisis (1.3 percent). That said, Asia still looks to fare better than other regions in terms of activity.

• Thailand and New Zealand = Hit by global tourism slowdown. 
• Australia = Hit by lower commodity prices 
• Pacific Island Countries = Vulnerable due to the limited fiscal space as well as comparatively underdeveloped health infrastructure 

In addition to the impact from domestic containment measures and social distancing two key factors are shaping the outlook for Asia:

• The Global slowdown: The global economy is expected to contract in 2020 by 3 percent—the worst recession since the Great Depression. This is a synchronized contraction, a sudden global shutdown. Asia’s key trading partners are expected to contract sharply, including the United States by 6.0 percent and Europe by 6.6 percent.
• China slowdown: China’s growth is projected to decline from 6.1 percent in 2019 to 1.2 percent 2020. This sharply contrasts with China’s growth performance during the Global Financial Crisis, which was little changed at 9.4 percent in 2009 thanks to the important fiscal stimulus of about 8 percent of GDP. We cannot expect that magnitude of stimulus this time, and China won’t help Asia’s growth as it did in 2009.

Policy priorities

This is a crisis like no other. It requires a comprehensive and coordinated policy response.

1. Support and protect the health sector to contain the virus and introduce measures that slow contagion. If there is not enough space within countries’ budgets, they will need to re-prioritize other spending.
2. Targeted support to hardest-hit households and firms is needed. This is a real economic shock—unlike the Global Financial Crisis—and requires protecting people, jobs, and industries directly, not just through financial institutions.
3. Monetary policy should be used wisely to provide ample liquidity, ease financial stress of industries and small and medium-sized enterprises, and, if necessary, relax macro-prudential regulations temporarily.
4. External pressures need to be contained. Where needed, bilateral and multilateral swap lines and financial support from the multilateral institutions should be sought. In the absence of swap lines, foreign-exchange market interventions and capital controls may be the alternatives.
5. Targeted support, combined with domestic demand stimulus in a recovery, will help to reduce scarring, but it needs to reach people and smaller firms.
6. Additional actions may be needed for emerging-market Asian economies that have limited space for increased spending in their budgets. If the situation deteriorates, many emerging economies may to be forced to adopt a “whatever it takes” approach, despite their budget constraints and non-internationalized currencies. In many cases, they will face policy trade-offs. For example, central bankers are considering buying government bonds in the primary market to support critical financial lifelines to smaller firms and households to avoid mass layoffs and defaults. An alternative to direct monetization could be to use the central bank’s balance sheet more flexibly and aggressively to support bank lending to small and medium-sized enterprises through risk-sharing with the government. In doing so, there can be a role for temporary outflow capital controls to help ensure stability in the face of large capital flows, balance sheet mismatches, and limited scope to use other policy tools.

Source: Chang Yong Rhee, 2020.