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World Bank's 'third shock' threatens to reverse Asia's economic progress

After trade war and COVID-19, continent-wide recession would put millions into poverty

| China
A clerk sorts yuan notes at a bank in Taiyuan, China on Feb. 24: Asia finds itself poorly prepared to confront a triple whammy of threats.   © Reuters

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

Good luck sleeping after reading the World Bank's take on how coronavirus is upending East Asia.

No bleaker update by the Washington-based institution these past few decades leaps to mind. It is not the language that is dramatic, but the number of blows hitting developing nations in the world's most dynamic economic region.

Three, to be exact. The trade war slamming supply chains since early 2018 was the first. The COVID-19 pandemic is the second. But the bigger threat is yet to come: a deep recession that pushes millions back into poverty in a region which has brought more than a billion out of it in the past 30 years.

The "third shock," as World Bank officials put it, is likely to push East Asian growth this year down to 2.1% from 5.8% in 2019. This, however, is the best-case scenario, one that sees Chinese gross domestic product growth dropping to 2.3%. The lower-case scenario is for regional growth of 0.5%.

Yet it is hard not to fear the World Bank is pulling its punches. Its suggestion, for example, that 11 million could slide into poverty seems wildly conservative for a region of 1.7 billion people confronting one crisis after another over the last dozen years. And its forecast assumes a strong bounceback in GDP later this year.

Where would that come from? For China, growth in the 2% range is full-blown-crisis territory, never mind lower. If things really go awry, and a second-half snapback does not materialize, Chinese GDP could end 2020 essentially flat.

The U.S. is cratering, as shown by 10 million Americans filing for unemployment insurance in just two weeks. That has rating companies like Fitch Ratings doing about-faces: within 10 days, it veered from projecting 1.3% growth globally this year to a 1.9% contraction.

Europe is stumbling, while Japan says its economy is in a severe situation. The lack of things to absorb these shocks is arguably unprecedented. In 1997, buoyant U.S. demand did more to bail out Asia than International Monetary Fund handouts. In 2008, massive stimulus made China a regional buyer of last resort. The 2013 taper tantrum, as the U.S. suggested it would start winding down its stimulus, unfolded amid normal trade and tourism flows.

U.S. President Donald Trump's tariffs upended the supply chains on which Asia relies for jobs and tax revenues. Now COVID-19 has billions staying home, too worried to consume much.

Hovering over all is this third shock, a financial storm on the horizon threatening to halt global commerce. Emerging market investors appear to be bracing for a scenario worse than the World Bank is laying out. The Institute for International Finance, for example, warns of a second wave of capital flight if things deteriorate further.

"The COVID-19 shock has resulted in a pronounced sudden stop in capital flows to emerging markets," says IIF economist Robin Brooks. The IIF's daily measurements point to "the largest emerging markets outflows ever" in the first quarter. These outflows are roughly twice the size of those at the peak of the global financial crisis.

Yet developing Asia faces challenges on top of the three shocks the World Bank detailed. One is the simultaneity of coming recessions. In 2008 and 2013, some economies and sectors took hits, while others stood their ground. The 2020 downshift is across the board.

Trade, tourism, commodities and remittances are in harm's way. The Bank of Thailand forecasts a 5.3% contraction in Southeast Asia's second biggest economy this year. The World Bank thinks Malaysia will shrink in all scenarios. Indonesia and the Philippines might eke out modest growth, though both could easily contract, too. Vietnam, Cambodia and Myanmar seem better positioned to ride out the storm.

Another problem is that aggressive fiscal and monetary stimulus since the 2008 crisis has left less ammunition to reignite demand. Elevated domestic debt levels in China, Malaysia, Thailand and Vietnam are now major vulnerabilities.

There is an utter lack of global cooperation at the G-20 level, lots of talk and the odd conference call but zero action. Then there is the relative weakness of leadership. If Joko Widodo of Indonesia, Rodrigo Duterte of the Philippines, Prayuth Chan-ocha of Thailand and others failed to remake economies amid stable growth, what makes us think they will be skilled crisis managers?

World Bank officials recommend extraordinary responses through government spending and central bank easing. Looser credit would help households and companies sustain the blows to come. So would cash transfers to consumers to support spending. Urgent investments in national health care systems and their capacities have never been more vital. Deeper regional coordination could increase the rates of success.

But Asia finds itself poorly prepared to confront this triple whammy of threats. The region's supposed reformers have been caught napping. This makes the World Bank's warning a timely wake-up call. If leaders do not heed it, 2020 will be remembered as the year Asia's hard-fought economic gains hit a wall.

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