28 July 2020 – When China’s GDP bounced 11% quarter-on-quarter in Q2, it affirmed views that the world’s most populous and the first country hit by the coronavirus pandemic may be on course for a V-shaped recovery, something which has become more of a fantasy elsewhere in the world.
China is will ahead of the game in terms of its recovery, but how did it get there, and what’s to come for the world economy?
China’s potential GDP is much higher than other countries
Christophe Barraud, chief economist and market strategist at Market Securities told Business Insider a reason why China has recovered faster than the US, is due to its higher potential real GDP growth, also known as real output.
He said: “Potential real output is much higher in China than in advanced economies. Chinese [potential] is close to 6% while for advanced economies it is close to 1.5%.”
Barraud added that demographics in China means that “mechanically Chinese growth will recover faster than in advanced economies.”
“I think for Europe or US it will be almost impossible to reach the level seen in the fourth quarter of 2019 before 2022,” Barraud said.
China’s economy will contract by 1.2% in 2020
Miguel Chanco, senior economist at Pantheon Macroeconomics told Business Insider: “The second half of the year is going to be very different from Q2. It’s going to be much softer. Now that’s a huge parts of China’s economy are sort of back to where they were pre-COVID-19.”
China’s economy grew by 3.2% year-on-year in the second quarter of the year and by 11% compared to Q1, beating Reuters economists’ predictions.
But he now expects growth in China to fall about 1.2% for the full year.
Chanco explains that China has recovered faster than the US and Europe due to the strict measures it took at the inception of the crisis.
“Because it’s taken a while for the virus to be suppressed in Europe, it will probably take a lot longer for those economies in [western] part of the world to sort of go back to their pre Covid rates of growth,” he said.
The US likely faces a double-dip or “W” shaped recovery
For the US, both economists are predicting a double dip recession, signified by a “W shaped recovery” or a swoosh-shaped recovery at best.
Market participants spent much of June speculating whether the US was on course for a V-shaped recovery as some states began to re-open and May’s jobs report showed the US added 2.5 million jobs defying expectations of 7.5 million jobs lost. But this V-shaped recovery expectation for the US has waned after a surge in virus cases.
The US surpassed its biggest single day-rise with more than 75,000 cases reported on Thursday. As recently as June 24 the record was 37,014, and the record has been broken 11 times in the last month alone.
“I think most developed markets will actually look like a Nike Swoosh. So, you basically have a very steep drop and prolonged sort of return for long and very gradual recovery. With the second wave in the US reaching new heights, I think you could probably see a double dip there,” Chanco said.
‘China has made other emerging markets look bad’
Chanco said India was the only country who he predicts an “L-shaped recovery” for, essentially a sharp contraction without any real economic comeback.
“We are expecting a 10% contraction in India’s economy this year and that’s historic in many ways for one who hasn’t had a recession in its modern history decades,” Chanco said.
“But in China we are probably looking at 1.2% contraction year-on-year. So that’s a huge difference in outcomes. I think this is where sort of China has made other emerging markets look bad,” he said.
“The governments of India, Brazil and other emerging markets haven’t really solved the problem of Covid or taken it seriously.”
Recent tensions between India and China could also prolong India’s recovery from the virus, Chanco said.
Tensions have flared in recent weeks between India and China, with some already speculating that the fighting on the two countries’ Himalayan border could be a catalyst for a major conflict.
Chanco explained India’s strong “protectionist response” to the flareup will likely be problematic given India’s reliance on China for imports, Chanco said.
Brazil, the country with the second largest number of cases worldwide, will recover faster than India from the virus, he said.
“In some ways Brazil being a commodity exporter will benefit to a large extent….. as the trade links between Brazil and China are a lot stronger than they are between China and India,” he said.”
Chanco added: “If Chinese demand recovers the way they expected to, then that will, to a certain extent, cushion the blow in Brazil. But India being a multi-domestic demand driven economy won’t have this sort of lift from any recovery and external demand.” Source (Business Insider)