The combination of the COVID-19 pandemic, spreading protectionism from trade to finance and technology and socio-political disturbances across major and emerging economies generated a perfect storm for the global economy, according to the International Monetary Fund.
Developed economy recession
The extensive and prolonged shutdowns of country borders and business activities as a result of the full or partial lockdown measures are expected to send all developed economies into the worst recession since the Great Depression of the 1930s, characterised by an unprecedented blow from both the supply and demand side to businesses which are facing supply-chain shocks on one hand and pandemic-driven fragility on the other.
That is the prognosis of the International Monetary Fund (IMF), which forecasts a contraction of 8% in the developed economies in 2020, particularly severe for the European Union.
Despite early lockdown easing starting in June 2020, the EU economy is not expected to see a fast rebound as global supply chains, especially for the vehicle and extractive industries, and consumer demand, both local and external, are still far from normal. Crippled by other risk factors such as Brexit, the IMF projects the euro zone economies will plunge as much as 8.3% in 2020, to be followed by a recovery of 5.2% in 2021. Meanwhile, the United Kingdom is likely to suffer serious damage from COVID-19, bracing for a 9.8% economic slump in 2020 and a 5.9% rebound in 2021.
The IMF expects the United States, with one of the highest numbers of confirmed COVID-19 cases in the world, to see its economy plummet 4.3% in 2020. The Sino–US economic conflicts and transatlantic trade tensions aggravated the fall, resulting in a 13.2% year-on-year drop in US merchandise trade during the first eight months of 2020.
Japan suffered both COVID-19 and a consumer recession triggered by the value added tax (VAT) increase in October 2019. The economy has recorded declines for three consecutive quarters since the fourth quarter of 2019 and is expected to dip 5.3% in 2020 as a whole, before a lukewarm 2.3% recovery in 2021.
Diverse performances in emerging economies
Despite a more upbeat outlook since the second quarter of 2020, commodity markets are still far from a sustained recovery as containment measures continue to deny a full resumption of economic activity. Unassuming energy and commodity prices lend little support to export-led economies. Developing countries with strong manufacturing sectors such as Mexico and Turkey could face stress from supply chain disruption. However, given relatively effective virus containment measures and substantial policy stimulus, Mainland China and many East Asian economies are expected to recover earlier and be stronger than most other economies.
Along with the slowest economic growth since 1980 with a 2% compound annual growth rate (CAGR) in the past five years, Latin America has become the new “red zone” for COVID-19. The IMF sees the region posting an 8.1% recession in 2020, the worst among emerging economies, to be followed by a mild recovery of 3.6% in 2021.
In Mainland China, export performance is expected to remain weak and domestic demand will be the main growth driver. Economic activity has been normalising since the gradual relaxation of lockdowns, with major output and consumption indicators picking up. The IMF projects a positive 1.9% GDP growth for 2020 and a major rebound of 8.2% in 2021.
Growth in the Association of Southeast Asian Nations (ASEAN) region is expected to stall in light of the pandemic but is expected to rebound in 2021 with effective containment measures and substantial policy stimulus.
The region will also benefit from the Regional Comprehensive Economic Partnership (RCEP), which was signed In November 2020 by the 10 ASEAN members along with Korea, Mainland China, Japan, Australia and New Zealand. As the world’s largest free trade agreement, it covers a market of 2.2 billion people (almost 30% of the world’s population) with a combined gross domestic product (GDP) of US$26.2 trillion (about 30% of the global GDP). The RCEP is expected to eliminate a range of tariffs on imports within 20 years. It delivers a single set of rules covering all 15 markets, making trade simpler and creating opportunities for exporters to bring their products and services into regional value chains.
Sourcing diversification
Concerns over COVID-19-related contagions and global supply chain disruptions, as well as rising trade protectionism, have prompted some companies to reconsider sourcing arrangements, including diversifying manufacturing facilities from the mainland to their home countries, a policy championed by a number of governments, notably the US and Japan. Significant restructuring of the global supply chain is unlikely in the near term but pressure to diversify sourcing could add to uncertainties in trade performance.
Rising protectionism remains a major threat to the world economy as well as Hong Kong’s exports amid the current global health and economic crisis. Despite the signing of the Phase One Trade Agreement in January 2020, the already complicated Sino–US relations have sunk to a new low amid tensions around the pandemic, technology and human rights.
Evolving consumption, business patterns
E-commerce continues to revolutionise the retail landscape as online marketplaces and omni-channel business models are proven to be pandemic-resilient. The wider adoption of smart solutions empowered by disruptive, artificial intelligence-(AI) or data-driven technologies continues to reshape the future of marketing and shopping, while pampering consumers with new buying experiences, fulfilment options and payment methods.
The pandemic has not only accelerated the deployment of 5G and Wi-Fi 6 technologies, but further enabled the implementation of blended, online-to-offline (O2O) business models characterised by the wider use of chatbots, cloud computing, AI and machine learning. As far as trade and manufacturing are concerned, the greater accessibility of cloud-based technologies and solutions involving Internet of Things (IoT), big-data analytics, 3D printing, blockchains and real-time management solutions are poised to enhance not only efficiency, but resilience of global production and logistics post-crisis.
Mainland economic initiatives
In response to the new global environment, the mainland is adopting a new development model of “dual circulation” with domestic demand as the main growth driver, to be reinforced by external demand and resources. New infrastructure development will be a key promoter of high-quality growth, focusing on areas such as 5G networks, inter-city transportation and inner-city rail systems, data centres, artificial intelligence.
The mainland’s outbound investment in Belt and Road countries and regions continued to increase, accounting for 13.6% of the country’s total outbound direct investment in 2019. Trade along those continues to grow as well with a rise of 6% in 2019 to exceed US$1.3 trillion, accounting for 29.4% of Mainland China’s total trade, up by 2 percentage points from 2018. Between January and August 2020, mainland companies’ direct investment in non-financial sectors of 54 countries and regions along the Belt and Road went up 31.5% year-on-year. Top investment destinations include ASEAN, the United Arab Emirates and Kazakhstan.
Business hub boost
The Free Trade Agreement (FTA) and Investment Agreement (IA) between Hong Kong and ASEAN have been progressively implemented since June 2019, and will come into full effect on 12 February this year. These pacts allow Hong Kong firms to gain enhanced market access to ASEAN and Australia, facilitating investment flows with the two regions and sustaining the city’s position as a world business hub.
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