COVID-19 could mean US$211 billion loss for Asia-Pacific economies: S&P

March 6, 2020

SINGAPORE - Ratings agency Standard and Poors is predicting that growth across Asia-Pacific will slow to 4.0% in 2020, the lowest since the Global Financial Crisis, due to the coronavirus outbreak. A U-shaped recovery should start later in 2020, but, by then, overall economic damage is likely to reach US$211 billion, S&P says.

"Household spending in Japan and Korea is set to weaken further, and slower growth in the U.S. and Europe will add to external headwinds," said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings.

"China's return to work is proceeding at a glacial pace as local officials remain cautious about a renewed upturn in infections."

Roache said the coronavirus epidemic was not expected to inflict permanent damage on the labour force or capital stock, so the region's economies should be employing as many people and producing as much output by the end of 2021 as they would have done in the absence of the virus.

"Still, even a U-shaped recovery will mean a regional economic loss of about US$211 billion that will weaken balance sheets," he said.

"Some economic activities will be lost forever, especially for the service sector."  

This loss, he said, would be distributed across the household, non-financial corporate, financial, and sovereign sectors.

The more that governments stepped in to cushion the blow with public resources, the more the burden would be shifted to the public sector.

"We now expect China to grow at just 4.8% in 2020 before rebounding strongly by 6.6% in 2021" he said.

"We make a very important assumption in our China forecast - that the Government shows flexibility with the growth target and steps lighter on the stimulus gas pedal compared to past downturns."

Roache said the hardest-hit economies remained Hong Kong, Singapore, and Thailand, where people flows and supply chain channels were large.

"It is no surprise that here we also see the most robust fiscal policy response, which will cushion the blow but not sharp downturns.

"We expect Hong Kong's economy to contract by -0.8% in 2020, Singapore's to flat line, and Thailand's expansion to slow to 1.6%."

Australia was also "quite vulnerable", with growth in 2020 expected to touch 1.2%, well below trend, Roache said.

"Australia's most-disrupted sectors employ a large share of workers, which will weaken both the labour market and consumer confidence."  

Services account for almost 80% of employment in Ausdtralia, with accommodation and catering - sensitive to tourism and discretionary consumer spending - alone making up over 70%. "We expect the Reserve Bank of Australia to cut rates once more to 0.25%," Roache said.

Local coronavirus transmission in Japan and Korea added a new, highly uncertain dimension to problems in these economies, with households likely to respond to a greater risk of infection by avoiding public spaces, which would depress spending on discretionary goods and services.

"In Japan and Korea, we estimate that discretionary consumption accounts for about 25% of GDP," Roache said.

"We now anticipate Japan's economy will contract by 0.4% and Korea's growth to slow to 1.1%."

He said Asia's emerging markets, such as Indonesia, Malaysia, the Philippines, and India, appeared somewhat insulated, with less exposure to China and global supply chains.

However, the outlook could get worse very quickly, for two reasons.

"If low reported cases are due, in part, to minimal testing, then viral spread is still possible, and could overwhelm weak healthcare infrastructure," Roache said. "Financial conditions could also tighten quickly.

"If investors ask for a much higher risk premium for emerging market assets, policymakers will have much less space to cut interest rates and boost public spending.  This could add to downward pressures on growth."  (ATI).