19/08/2020 How is the pandemic affecting Asia's economic growth?

| World Economic Forum

IMF: These 3 policies could help Asia's

economic recovery from COVID-19

The pandemic has been incredibly costly to Asian economic growth. Image: REUTERS/Kim Hong-Ji

This article is published in collaboration with

IMF Blog

07 Jul 2020

Chang Yong Rhee

Director, IMF's Asia and Pacific Department

Asia's dependence on global supply chains means it continues to suffer

economically, as the coronavirus pandemic persists across the world.

The region is projected to rebound strongly by 6.6% in 2021, but this figure is still
5% lower than what was originally predicted.

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Close co-ordination between fiscal and monetary policy, reallocating resources

and readdressing equalities could all help aid Asia's recovery.

For the first time in living memory, Asia’s growth is expected to contract by 1.6 percent—a
downgrade to the April projection of zero growth. While Asia’s economic growth in the first
quarter of 2020 was better than projected in the April World Economic Outlook—partly owing to
early stabilization of the virus in some—projections for 2020 have been revised down for most of
the countries in the region due to weaker global conditions and more protracted containment
measures in several emerging economies.

Asia is heavily dependent on global supply chains and cannot grow

while the whole world is suffering.

In the absence of a second wave of infections and with unprecedented policy stimulus to support
the recovery, growth in Asia is projected to rebound strongly to 6.6 percent in 2021. But even with
this fast pickup in economic activity, output losses due to COVID-19 are likely to persist. We
project Asia’s economic output in 2022 to be about 5 percent lower compared with the level
predicted before the crisis; and this gap will be much larger if we exclude China, where economic
activity has already started to rebound.

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Asia's protracted recovery. Image: IMF

Clouds on the horizon

Our projections for 2021 and beyond assume a strong rebound in private demand; however, this
may be optimistic for several reasons:

Slower growth in trade. Asia is heavily dependent on global supply chains and
cannot grow while the whole world is suffering. Asia’s trade is expected to contract
significantly due to weaker external demand, with total trade (exports plus imports)
projected to decline by about 20 percent in 2020 in Japan, India, and the
Philippines. Reorienting Asia’s growth model toward domestic demand and away
from a heavy reliance on exports has begun but will take more time to be
completed.

Longer than expected lockdowns. Even when lockdown measures are fully
relaxed, economic activity is not likely to return to full capacity, due to changes in
individual behaviors and measures put in place to maintain physical distancing and
reduce contagion. Our recent study shows that while a lockdown may lead to a
contraction in economic activity—as measured by industrial production—of about
12 percent a month, a full reversal in containment measures may increase
economic activity by only about 7 percent. In addition, many Asian economies—
especially Pacific Islands countries—depend on tourism, remittances, and other
services that require in-person contact, which will take a lot longer to recover.

Rising inequality. Inequality had already been rising in Asia, and our recent
research shows how past pandemics led to higher income inequality and hurt
employment prospects of those with limited education. These effects are likely to
be exacerbated in Asia due to the large proportion of informal workers, making the
recovery more protracted.

Weak balance sheets and geopolitical tensions. Weakened household and

corporate balance sheets in many Asian countries can weigh negatively on

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investor sentiment and amplify the effect of increasing uncertainties associated

with geopolitical tensions.

But not all recent developments have been negative. Many Asian countries have been able to
provide significant monetary and fiscal policy support—often in the form of guarantees and loans
to households and firms. And lower oil prices and improved market sentiment and financial
conditions are helping the recovery. However, these factors may not last. For example, our recent
update on global financial stability cautions that a sharp adjustment in financial conditions—
correcting the current disconnect between financial markets and other parts of the economy—
could exacerbate already high borrowing costs for many Asian frontier markets and low-income
countries, notably Pacific island countries.

Policies for the recovery

Asian countries are experimenting re-opening, and policies must be geared toward supporting
the nascent recovery without exacerbating vulnerabilities. They must use fiscal stimulus wisely
and complement it with economic reforms. The priorities include:

Close coordination between monetary and fiscal policy. Monetary policy should help ensure the
flow of credit to households and business. Countries facing higher fiscal constraints could also
use the central bank’s balance sheet more flexibly, aggressively, and transparently to support
bank lending to smaller firms. In the face of large outflows, balance sheet mismatches and limited
scope for macroeconomic policy maneuver, temporary capital outflow measures may be needed.

Resource reallocation. A robust recovery hinges on exiting the current phase of support and
transitioning to new policies that help ensure resources are reallocated appropriately beyond the
initial focus on preventing bankruptcies of incumbent firms, and thereby strengthen the solvency
of firms. For example, flattening the bankruptcy curve by streamlining the restructuring and
insolvency frameworks; ensuring that banks are adequately capitalized; and facilitating equity
injections into viable firms and risk capital for new firms.

Addressing inequalities. Access to health and basic services, finance, and the digital economy
should be broadened. Social safety nets should be expanded to extend unemployment insurance
coverage to informal workers. Addressing pervasive informality will also require comprehensive
labor and product market reforms to improve the business environment and removing onerous
legal and regulatory obstacles (especially for startups), and policies to rationale the tax system.

IMF support

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