Welcome to the first truly global recession of the modern era. The pandemic disrespects national borders and is contemptuous of differences between regions and levels of economic development. Unlike in the global financial crisis and the trough that followed the 2001 terrorist attacks in the US, all regions are suffering contractions. Asia’s policy makers need to remember that when plotting the path ahead as economies emerge from lockdowns.
Even during its homegrown meltdown in the late 1990s, Asia managed 1.3 per cent growth. Back then, China was surging and the US was coasting on a technology-driven boom. Today’s simultaneous slide has seen China lose its image as a bountiful regional patron that could be relied on to continue posting relatively robust growth rates. Asia has also taken a hit from the slump in the US, whose multinationals anchored many of the supply chains that lifted the region to prosperity. For its part, the West leaned on Asia to alleviate prior lean times.
The all-in-it-together nature of the corona-collapse was underscored by the International Monetary Fund (IMF) on Wednesday. The lender said that global gross domestic product will shrink 4.9 per cent this year, down from April’s estimate of a 3 per cent drop. Asia-Pacific, which the IMF had previously thought would be flat, got its share of downgrades. Japan, South Korea and the Association of Southeast Asian Nations will all suffer a deeper contraction; China will eke out growth of 1 per cent. India suffered the biggest cut of any major economy, with the IMF tipping a dip of 4.5 per cent compared with April’s projection of modest growth.
Adam Posen, president of the Peterson Institute for International Economics, was on the money when he told the Asian Monetary Policy Forum two weeks ago that the GFC should be renamed the North Atlantic Financial Crisis. That disaster hardly merits the “global” tag when set beside the carnage of 2020.
In such a synchronised slump, it’s policy rather than individual countries that must save the day. The swiftness of the global monetary response stopped an economic crisis from becoming a financial meltdown. Although the moves weren’t coordinated, policy has been eased dramatically almost everywhere since March. Fiscal policy, having stirred more slowly at the outset, has exceeded pledges made during the Great Recession.
The darkest economic hours are likely to be this quarter, followed by some kind of bounce in the following three months. Activity won’t return to pre-pandemic levels for years, though.
It would be a tragedy to set aside this fiscal and monetary achievement before meaningful recovery has arrived. That’s what happened in the aftermath of the last crisis, and it could happen again. Fiscal expansion a decade ago gave way to budget austerity in Europe and the US. Meanwhile, central bankers have consistently overestimated growth and inflation pretty much ever since. The lesson is particularly prescient given some economies that have reopened are now seeing spikes in coronavirus infections that risk renewed widespread lockdowns. Cases are surging in Florida, Texas, Arizona and California. New York, New Jersey and Connecticut set quarantines for travellers from virus hot spots. Australia’s state of Victoria shelved a scheduled relaxation of restrictions.
Flares have already gone up in the battle over how much stimulus to keep and for how long. Bank of Korea Governor Lee Ju-yeol said June 12 that the bank should be prepared to normalise policy once the crisis subsides, and that officials should be alert to the risk of financial imbalances. That would be fair enough in normal times. But in the context of no ordinary recession, this looks like an unwise attempt to set boundaries. Philippine central bank Governor Benjamin Diokno said this week there’s “too much liquidity” and signalled an end to cuts in commercial lenders’ reserve levels. Bank of England Governor Andrew Bailey began sketching an exit strategy in a Bloomberg Opinion column this week.
Doubling down on monetary policy is all the more desirable because of the hurdles to implementing fiscal stimulus. Prime Minister Shinzo Abe likes to tout Japan’s outlays worth 40 per cent of GDP, but there are huge administrative problems getting money to people. The lifeline thrown to Americans by Donald Trump is temporary and the White House is wrangling with Congressional leaders over whether and when to undertake further stimulus — and what form that might take.
The risks of cutting back are acute precisely because the third quarter promises to be better. A horrific first half will flatter even the most mediocre of performances in coming months. Improvement will also reflect the speed and breadth of the policy response. Covid-19 is the first really globally shared crucible since the world wars of the 20th century. It would be ironic, as well as devastating, if some of these props were removed just when they are working.