Asia's losses from the coronavirus will approach US$3 trillion, according to research released Friday by Standard & Poor's. Japan and India in particular will be badly hurt this year, while the Philippines and Thailand will see the worst long-term damage. But China, epicenter of the original outbreak, is likely to post growth even for this year.
Asia's total economy is likely to contract 1.3% in 2020, steeper than the original forecast of a 0.9% fall, before rebounding to 6.9% growth in 2021, S&P Asia Pacific Chief Economist Shaun Roache and Asia Pacific Economist Vishrut Rana suggest in the report. Asia has posted notable early successes in combatting the virus and macro policies have been generally swift and effective.
"This can help cushion the blow and provide a bridge to the recovery," the economists write. Still, by the end of 2023, their long-term forecasts suggest "permanent damage" to output of 2% to 3% -- if all goes well. "Risks are more balanced as pandemic curves flatten, but remain prominent."
The forecasts imply US$2.7 trillion in lost output over this year and next, and that's assuming broad containment of the coronavirus. China's economy is likely to grow 1.2% in 2020, heading north of 7% in 2021, some of the best figures in the region. Still, China's GDP has lost 3.3% in size compared with pre-virus trends, one of the biggest hits in the region.
Thailand's dependence on tourism, which contributes about 11% of the economy, is its greatest weakness in this downturn. S&P anticipates a permanent economic loss of 3.8% of GDP compared with pre-Covid trends, significantly higher than the Asian average of 2.2%.
The Philippines has been hurt by having both one of the world's longest tight lockdowns in urban areas coupled with Covid-19 cases remaining stubbornly high. This combination has led to stalled economic activity.
The economy in the Philippines is likely to shrink 3% this year, S&P says, compared with growth of 6% in 2019. If the virus does not continue a persistent spread and if private-sector balance sheets are not too hurt by the length and magnitude of the downturn, growth should rebound 9.4% in 2021, S&P predicts. Nevertheless, the Philippines GDP has lost 4.5% compared with pre-virus trends, the worst hit in Asia.
One bright spot should be South Korea. The long-term impact compared to trend is for a 0.4% drop from pre-Covid growth projections. Only Taiwan, also with a 0.4% drop in growth, gets off so lightly.
Why? Korea contained its early outbreak of the virus and has been reopening without ever entering a strict lockdown. Taiwan managed to avert a large outbreak thanks to a swift lockdown on travel.
Both Taiwan and Korea have high exposure to the resilient technology sector. That should result in better economic performance, with a modest short-term contraction of 1.5% in the Korean economy followed by a swift recovery. Although employment has started to pick back up, the re-entry of Koreans into the work force may maintain the jobless rate above 4.5%, holding back consumption.
Korea and China appear to be "early exiters" from the initial onslaught of Covid-19, while Taiwan never entered it. Their mitigation policies have largely worked, although further waves of infection are still possible. At the other end of the spectrum, India and Indonesia are likely to emerge last from the pandemic onset because their case counts continue to rise. It's not yet clear that containment measures there are succeeding.
By late 2021, S&P assumes that mitigation policies in Asia can be gradually phased out, with consumer and company behavior normalizing. "Uncertainty remains high, of course," S&P says as a caveat, not expecting a vaccine to be found before some kind of "new normal" ensues.
The Covid-19 recession, while hard to predict precisely, will likely have a similar effect on Asia as the global financial crisis of 2008-2009, S&P finds, which was milder in Asia than in Europe and the United States; the latter resulted in a 3% economic drop in Asia. The Covid recession would not be as severe as the Asian financial crisis, which in 1997-1998 knocked a full 12% off Asia's economy, but it would be worse than the dot.com bust in 2001.
The short-term cost to Asia is around US$1.6 trillion. "Many activities hit by Covid-19 mitigation in 2020 - from restaurant meals to vacations - are lost forever," Roache and Rana say.
The S&P medium-term forecasts anticipate an accelerating trend of de-globalization, but the economists admit there's "little doubt" this could worsen. Protectionism is on the rise as economic and political battle lines form.
"Covid-19 has hardened economic nationalism, and may spur new attempts by large economies to disrupt supply chains, use trade as a diplomatic tool, and impede foreign direct investment," the report warns.
Although the United States claims that the Phase One trade deal with China remains in effect, there's plenty of scope for the relationship between the two superpowers to worsen. Absent a sudden escalation, S&P warns that the parable of "boiling the frog" may be apt, referring to a situation in which protectionist heat is turned up to the point where the economy (the frog) doesn't notice the danger of the boiling water until it's too late.