Stephen Roach suspects that the Covid-19 epidemic could be the shock that drives a wobbly global economy into recession

Stephen Roach suspects that the Covid-19 epidemic could be the shock that drives a wobbly global economy into recession

The world economy has clearly caught a cold. The outbreak of COVID-19 came at a particularly vulnerable point in the global business cycle. World output expanded by just 2.9% in 2019 – the slowest pace since the 2008-09 global financial crisis and just 0.4 percentage points above the 2.5% threshold typically associated with global recession.

Moreover, vulnerability increased in most major economies over the course of last year, making prospects for early 2020 all the more uncertain. In Japan, the world’s fourth-largest economy, growth contracted at a 6.3% annual rate in the fourth quarter – much sharper than expected following another consumption-tax hike. Industrial output fell sharply in December in both Germany (-3.5%) and France (-2.6%), the world’s fifth- and tenth-largest economies respectively. The United States, the world’s second-largest economy, appeared relatively resilient by comparison, but 2.1% real (inflation-adjusted) GDP growth in the fourth quarter of 2019 hardly qualifies as a boom. And in China – now the world’s largest economy in purchasing-power-parity terms – growth slowed to a 27-year low of 6% in the last quarter of 2019.

In other words, there was no margin for an accident at the beginning of this year. Yet there has been a big accident: China’s COVID-19 shock. Over the past month, the combination of an unprecedented quarantine on Hubei Province (population 58.5 million) and draconian restrictions on inter-city (and international) travel has brought the Chinese economy to a virtual standstill. Daily activity trackers compiled by Morgan Stanley’s China team underscore the nationwide impact of this disruption. As of February 20, coal consumption (still 60% of China’s total energy consumption) remained down 38% from the year-earlier pace, and nationwide transportation comparisons were even weaker, making it extremely difficult for China’s nearly 300 million migrant workers to return to factories after the annual Lunar New Year holiday.

The disruptions to supply are especially acute. Not only is China the world’s largest exporter by a wide margin; it also plays a critical role at the center of global value chains. Recent research shows that GVCs account for nearly 75% of growth in world trade, with China the most important source of this expansion. Apple’s recent earnings alert says it all: the China shock is a major bottleneck to global supply.

But demand-side effects are also very important. After all, China is now the largest source of external demand for most Asian economies. Unsurprisingly, trade data for both Japan and Korea in early 2020 show unmistakable signs of weakness. As a result, it is virtually certain that Japan will record two consecutive quarters of negative GDP growth, which would make it three for three in experiencing recessions each time it has raised its consumption tax (1997, 2014, and 2019).

The shortfall of Chinese demand is also likely to hit an already weakening European economy very hard – especially Germany – and could even take a toll on a Teflon-like US economy, where China plays an important role as America’s third-largest and most rapidly growing export market. The sharp plunge in a preliminary tally of US purchasing managers’ sentiment for February hints at just such a possibility and underscores the time-honored adage that no country is an oasis in a faltering global economy.

In the end, the epidemiologists will have the final word on the endgame for COVID-19 and its economic impact. While that science is well beyond my expertise, I take the point that the current strain of coronavirus seems to be more contagious but less lethal than SARS was in early 2003. I was in Beijing during that outbreak 17 years ago and remember well the fear and uncertainty that gripped China back then. The good news is that the disruption was brief – a one-quarter shortfall of two percentage points in nominal GDP growth – followed by a vigorous rebound over the next four quarters. But circumstances were very different back then. In 2003, China was booming – with real GDP surging by 10% – and the world economy was growing by 4.3%. For China and the world, a SARS-related disruption barely made a dent.

Again, that is far from being the case today. COVID-19 hit at a time of much greater economic vulnerability. Significantly, the shock is concentrated on the world’s most important growth engine. The International Monetary Fund puts China’s share of global output at 19.7% this year, more than double its 8.5% share in 2003, during the SARS outbreak. Moreover, with China having accounted for fully 37% of the cumulative growth in world GDP since 2008 and no other economy stepping up to fill the void, the risk of outright global recession in the first half of 2020 seems like a distinct possibility.

Yes, this, too, will pass. While vaccine production will take time – 6-12 months at the very least, the experts say – the combination of warmer weather in the northern hemisphere and unprecedented containment measures could mean that the infection rate peaks at some point in the next few months. But the economic response will undoubtedly lag the virus infection curve, as a premature relaxation of quarantines and travel restrictions could spur a new and more widespread wave of COVID-19. That implies, at a minimum, a two-quarter growth shortfall for China, double the duration of the shortfall during SARS, suggesting that China could miss its 6% annual growth target for 2020 by as much as one percentage point. China’s recent stimulus measures, aimed largely at the post-quarantine rebound, will not offset the draconian restrictions currently in place.

This matters little to the optimistic consensus of investors. After all, by definition shocks are merely temporary disruptions of an underlying trend. While it is tempting to dismiss this shock for that very reason, the key is to heed the implications of the underlying trend. The world economy was weak, and getting weaker, when COVID-19 struck. The V-shaped recovery trajectory of a SARS-like episode will thus be much tougher to replicate – especially with monetary and fiscal authorities in the US, Japan, and Europe having such little ammunition at their disposal. That, of course, was the big risk all along. In these days of dip-buying froth, China’s sneeze may prove to be especially vexing for long-complacent financial markets.


Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate, 2020, published here with permission.

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This virus disaster clearly manifested President Xi's vision of the world expressed in the UN Convention in 2017 -- "A community of shared future for all humankind". And the Belt and Road Initiative are the two arms holding us tightly together and remain strong.

The world should work closely together to defeat this virus.

加油!

Have you washed your hands before holding arms with other people?

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China certainly embraced the debt based credit system and now it looks like the wheels could come off.

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The Belt and Road would act as a superhighway for the next Chinese corona-virus.

We need few more islands to quarantine sick people.. Now where are the old maps Comrade?
Mr President, we've found 2 big islands at Latitude -46 :-35 and longitude -176 : 178.

Does the Belt and Road lead straight to Iran............

President Xi say if you no let us come to NZ to infect you maybe we no buy your milk!!

Have you stopped eating exotic animals for a start?

Why the world now? - Since when? the past 5000yrs of Chinese civilasation - that showing China care about the world? - for such adversity? now China need the world? - May be?, it's about time the world move from the main resources that China offer to the world in term of 'capitalisation, globalisation, restructuring, cutting cost'.. their 1.3billion cheap labour services. World population is exceeding China population for sure. Now check out from that beautiful word manifest of 2017, what does China shared with the Pacifica nations? - C'mon Xing, The rule book is just one from Chinese magic weapon point of view: United front works, that all in the end for the benefit of China. The 'mankind' is just slogan - promoted to the world's every Nations ruling elite... but never trickled down to it's own population. China is for Chinese, Chinese is for China, China is forever consumerism expansion, consuming means taking the resources, Chinese only travel/allow capital movement if the destination host allowed: 1) purchase of land to live 2) It's people migration. This is not a new pattern, check it worldwide, the past 200-400 yrs. - giving back resources, sustainable, betterment of mankind/overall every Nationhood population well being, are never embedded in CCP psyche - For start, you can re-visit that words; Belt & Road, two arms - how about other initiatives.. say came from little country somewhere in the far corner of the world? - does it matter? or Not, point taken - since when?, China will listen to other Nations input? - China will use it's own voice, try to dictate the world, never listen.. why? we've been here for 5000yrs.. by the way.. how many years of the Dai Nippon? Egypt? Greece? - China current strength is as good as the world willingness to out resource their production to China - now, with this outbreak - the world may start to think, hmnn.. actually there're about 200 Nations on this planet, total populations exceeding 7 billions, why do we keep on out sourcing stuff from China - what do China gave to the rest of those Nations, do ask their populations, (not their ruling elite). Charity is not the main Chinese forte.

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bird Flu, sars, covid 19 all come out of china.
so one has to wonder is it worth having ties to a country that keeps creating medical mayhem

You forgot to mention Ebola, HIV, H1N9, swine flu, MERS, and the current influenza in the US (https://weather.com/health/cold-flu/news/2020-01-28-flu-more-deadly-than...).

Bias potato..

you might want to check your facts
swine flu was mexico
ebola was Africa
mers was the middle east
HIV was the USA
typical trying to take credit for things they did not create but copied

H1N9? you mean H9N1 which evolve to H9N2 - aka Avian/bird Flu, first identified from? .....

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The greater the decoupling from the CCP's China the better. The civilised world - meaning the nations that have any interest in preserving basic human and democratic rights - should not be enriching its declared enemy. Would we have wanted to enrich Nazi Germany? Soviet Russia?

The assertions of xingmowang are merely idiotic, but the CCP is deadly serious in its determination to undermine individual and political freedom - both of which are an existential challenge to the maintenance of CCP tyranny. The CCP agents infecting our own political system are not doing so for personal entertainment.

I have no affection for the CCP.

But looking at what the US government has done over the past few decades: Mass NSA surveillance, Guantanamo Bay, Drone strike executions, invasion of whole countries, undermining their own rule of law/democracy, undermining action on Climate change. Attempting to claim the US/West as some sort of bastion of human and democratic rights is pretty laughable.

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Nothing human is perfect. Unchecked power - as in your example, US power - always leads to excess of its exercise. It's a matter of deciding on the least worst system. And there is no question that the US - with all of its faults - has been guarantor of the freedoms you and I enjoy, and that the democratic West has generally enjoyed. Democracy - again with all its faults - is worth preserving. Sometimes, as in the world now, we make a choice. The 'disappeared' in China, if they had a voice, would explain the choice clearly.

I'm just asking that people view both countries with the same standards. By many measures, China is unquestionably worse than every western government. But other measures, countries such as the US are far and away the worst offenders.

I think you summed it up yourself nicely. You are willing to overlook the US abuses of human rights simply because you believe it will benefit you as a member of a 1st world western democracy.

No, Miguel, I do not 'overlook the worst US abuses of human rights for [personal benefit] as a member of a 1st world western democracy'. Today, we cannot but be aware of abuse wherever it is in the world, whoever the perpetrators. And, as members of a democracy, with international standing and connection, we can agitate for change, vote for change, influence change, achieve change. Certainly, it's a personal benefit. It's also a social, cultural, economic and national benefit. Try any of this in the PRC.

Presumably we should be acting based on what countries are doing currently?

Or should we be refusing to trade with Germany because of what the German government did in the 30s and 40s?

Yes to your first question. The notion of a benign PRC, gradually adopting internationally approved norms, has been exposed as delusion. We need to act with the knowledge we have of the CCP's revealed and actual character. I don't understand your second question. It's current behaviour that matters. We live in the world of now.

Sorry, replied to the wrong comment. Yes, PRC is definitely engaging in some pretty terrible stuff these days.

Miguel has a very valid point. The US uses it's military might to perpetrate violence and human rights abuses in other countries that aren't like them, for their own goals. This includes invading countries to secure resources (Iraq for instance killed half a million civilians), selling weapons to despotic countries to prop up their military industrial complex which are then used in near genocide (Saudis in Yemen, Israelis etc etc), attempting regime change in all manner of countries, causing and refusing to do anything about climate change which is mostly killing people in other countries... so many horrific acts. These then prop up and legitimise their version of democracy.

Before you go about "enjoying your freedom", remember that it's built on the bones of the less fortunate. Yeah, it's great to be in the US or one of it's close allies, but if you are in their cross-hairs, watch out. You are about to be "given freedom" (which is code for "enabling us to be free, at your expense").

Saddam's brutal regime killed more than 30k a year - excluding the military casualties in the wars he started. Since his overthrow it is down to about 12k - almost entirely from sectarian violence, and in last two years only 2-3k a year with democratic government. https://en.wikipedia.org/wiki/Iraq_Body_Count_project that seems like a positive (though not ideal) result to me. US have been quite altruistic in many of their military interventions deposing despots and horror regimes (like Taliban) - at great cost to USA.

Certainly the war in Bosnia went on and on as the EU tried to be even handed and were pathetic; when USA dropped a few bombs the problem and the violent deaths stopped. It was their failure to stop the civil war genocide in Rwanda that haunts me.

I remember reading a clear warning in the economist 6 weeks before the Rwandan genocide that it was going to happen. No one did a thing (except France who sent a few plane loads of weapons to help the perpetrators).

New Study Documents Depleted Uranium Impacts on Children in Iraq - Saddam was a amateur compared to the hell USA has rained down o Iraq.

The use of these weapons was a small part of the damage done to Iraq, its people, its society, and its natural environment by the war. We ought not to require any legal case before offering aid and making reparations. Basic human decency ought to suffice.
https://www.foreignpolicyjournal.com/2019/09/21/new-study-documents-depl...

So what are our choices? We can lie on our beds and rage about the wrongness and wickedness of being on the sweet side of the apple, and the bad the US has done. Or we can use our freedom - which, within the corruption, iniquity and brutality of much of the world is a genuine privilege - to do what we can to improve things. And that - working for the betterment of things - is truly to enjoy the uses of freedom. Much of the world doesn't have those choices. Our responsibility, it seems to me, is to use them.

Miguel, Are you sure about your comparisons, interpretations they don't seem equivalent or full fact.

Have any USA activities and the things you describe, have any of those made you worse off, poorer or unhappy?

Drone strike executions of known terrorist leaders is clearly something we should all raise our voices against...

What about collateral damage. The person who is in the wrong place at the wrong time. I'm all for bringing terrorist leaders to justice but killing the innocent along with the guilty - something tells me that is sliding down a slippery slope to justify just about anything.

What happened to a fair trail? Rule of law?

Nah it's easy to just put people on a list and drop a bomb on their heads. Civilian casualties are an afterthought. Wait... if I walk around the street and kill some civilians I am a terrorist right? But if I drop bombs in another country and kill civilians I am a saviour! Brilliant logic.

So because I don't live in Iraq I can't empathise with what has been done to that country?

Because the full impacts of climate change haven't yet been felt, that somehow makes the US repeated sabotage of climate negotiations somehow acceptable?

No, empathy emotions and feelings are fine, I observe your comparisons didn't seem equivalent.

Iraq.
https://en.m.wikipedia.org/wiki/Sanctions_against_Iraq

What's your view on Paris Accord.
Europe Union obtain 3 cents benefit for every $ they spend.
Shaw & Co are booking us to spent 5 trillion dollars that will delay global warming by 23 days in yr 2100.

US has faults, but they have (at enormous cost in lives and money) maintained the pax Americana for 70 years, serving as vanguard preventing totalitarian take over, an enormous philanthropic effort even if there has been significant collateral damage. They do not practice widespread organ harvesting of dissidents for cash - turning humans into livestock. Nor are they genocidally wiping a whole ethnicities from the planet using 1930's style concentration camps. China's rulers are utterly ruthless, corrupt, evil Han supremacists. To fix the world target the worst, not the generally benevolent.

Half of China is in lockdown.
Stephen Bannon.

https://youtu.be/QlF0LcQO9Tg

This is bang on.

@XingMo needs to watch this.

Chinese GDP growth data is worthless - just PRC propaganda disconnected from reality (like their WuFlu numbers). "According to Michael Pettis, China’s real GDP growth is half the reported number, that is, it is around 3–4%. Brookings Institution estimated that GDP growth is about 4%. This puts the current nominal GDP of China at around $10–11 trillion, far less than reported figure of $14 trillion and still far behind the US GDP of $20 trillion" https://medium.com/datadriveninvestor/four-reasons-why-you-shouldnt-trus...

I wonder what the supply chain for surgical masks and latex gloves is? Hope their manufacture hasn't ground to a halt.

well you would expect their workforce to be well protected... if they trust their own product

PM says don't worry we have 16million masks, which is about 3 days at only one mask per person per day.Noting they only slow down the rate you spread it, and have little effect on whether you catch it.

So what would you do then?

Keep and extend travel bans, build resilience

The rate of spread is too fast for a vaccine to impact. China went from 1 patient to a million or more (real numbers, not PRC fabrications) in 3 months. The rest of their population will be exposed over next 3-6 months (they can't maintain quarantine, they will starve and their economy will flounder). Outside of China seeing unstinting 10x growth every 20 days. In 4 months that is whole of world's population. Next 3-6 months will be calamitous, and then we will slowly start to put things back together.

with a death rate of 2% it does not look as bad as some other virus But the kicker is the 20% hospitalization rate that will hurt most countries economies and over well their system.
I would hate to think what will happen when it reaches NZ our hospitals now can not cope with our population

but if the hospitals are full then do those 20% who don't get treatment die?

I understand the death rate is several times higher for those who need but can't access ICU treatment.

This is a critical point. Our hospitals are already overloaded due to Govt policy of under funding and over populating. People will end up dying in the hospital carpark or at home.

Yes, unless we institute mandatory 2 week quarantines until a vaccine becomes available. NZ might still be able to dodge this bullet, if the Govt is prepared to spend 10 billion on shuttering tourist industry for a year instead of risking 50-100k lives.

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But wait, Liam Dann says recession in NZ is 'highly unlikely'.
Apparently we are immune.

If anyone can access to the latest episode of ABC's Four Corner documentary on this Corona virus, via VPN. There is much more to play on this outbreak yet! Quite concerning really..

Peak prosperity
Shows Singapoe & South Korea and good community testing.
Think of the contrast.

https://youtu.be/fLYnomkC1fA

If ever there an arguement for anti-globalisation, nationalism and self reliance.... This is it!

Machine learning provides opportunity to economically repatriate a lot of industry to West given the increased ability to cheaply automate processes. This may be just the push required to bring manufacturing back to the west.

Very true. And that means developing local skills too. We could then make things that add quality and value to the lives of people worldwide. Not just fretting about tourism and commodity prices wholly out of our influence. And reducing the need for immigrants to provide houses, alcohol, fast food, etc, for other immigrants as an economic strategy. Perhaps we could even get GDP per capita off the floor, and improve the prospects and lives of many more people in wretched circumstances here.

Methinks recent events will make us all think a little differently. This could be a blessing in disguise? Who knows. One thing is clear, and becoming clearer, globalisation had one winner. China. Now we're about to learn how costly that might be. The counting has already begun.

China was in deep poo even before this. They've been lying about their birthrate for 20+ years, exaggerating child numbers by up to 50%. Likely only 1.28billion (not 1.4 billion) and population may have already peaked. Certainly the working population will start to drop sharply soon - making the economic growth hard to sustain. Their repressive govt also severely limits development of consumer economy. Small houses, no space for toys and 'stuff', few cars, few holidays, few gear-heavy hobbies. And of course incredibly overpriced real estate - wealthy Chinese in NZ mostly got that way off buying an apartment or two 20 years back that is now worth many many millions.

"Could cause a global recession"...how many times a week for years have you seen headlines with question marks about recession? By now everyone must be immune to the term "recession". The stock market never really goes down - it just dips for a day or two then it's at another high. House prices always go up (and so do our salaries, right?).
Recession! Don't believe it - even thermal-nuclear distruction at this rate would fail to dent the "awesomeness"!

China will start the Wuhan steel factory going on again, so I think this Roaches article just a bit misnomer. 2020 just started with minor glitch due to this bug, the truth? CCP already have full control of it, so much so it can even shifted to Japan, South Korea, Iran, Italy.. & any of those nations that has winter on their climate systems. World soon will realise and take notice seriously, as how supreme the resolution from China. Remember, China is the one that bring joy/fireworks to this planet, so this kind of article really only doing a disservice of good works. Long live CCP, forever marching on, no force can stop China & it's people progress to colonise all this planet, China is the only shining beam of answer from this world dark ailments. Everyone that has liaison closely with China/Chinese will be benefited, for sure, no doubt about it. Your property will increase in value just by sitting next to Chinese neighbour guaranteed.

Great article, this guy nails it. Prepare for a Global recession.

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