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Hard times ahead, but Asia poised to lead global recovery

Source: Asia Insurance Review | Aug 2020

Euler Hermes predicts a U-shaped economic recovery, global trade not expected to return to pre-crisis levels until 2023. 
By Ridwan Abbas
Trade credit insurer Euler Hermes expects aggregate GDP growth for Asia-Pacific to decline to -1.3% this year, after its latest revision saw lower GDP forecasts in India (-3.3%), Indonesia (-1.5%), Hong Kong (-5.9%) and Singapore (-5.1%). 
On the whole, Euler Hermes expects global GDP to contract by -4.7% in 2020, followed by growth of 4.8% in 2021. However, a lot is dependent on how governments manage the risks of a second wave of COVID-19 as several countries face the prospect of renewed outbreaks and false restarts. 
In a global recovery scenario, Asia seems well positioned to lead the way given the high growth potential of several of the region’s economies. 
“Our forecast for Asia is less negative compared to other regions like Latin America and the Eurozone, although there is disparity within Asia with some economies helping to drive growth while others will be laggards,” Euler Hermes senior economist for APAC Françoise Huang told Asia Insurance Review
China is predicted to be among those driving global growth since it was the first to restart its economy. The government has also rolled out generous fiscal stimulus measures, which Euler Hermes estimates amounts to 7.1% of GDP - compared with 5.7% over 2018-2019. 
“Overall, we expect China’s GDP growth at +1.5% in 2020 and +7.6% in 2021 (after +6.1% in 2019), as long as downside risks do not materialise. These include the risks of new COVID-19 outbreaks and rising protectionism, for example between the US and China,” said Ms Huang. 
Countries that are more exposed to the Chinese economy would naturally benefit from China’s recovery, with Euler Hermes revising upwards 2020 GDP forecasts for these countries. They include South Korea (-1.5%), Taiwan (-0.3%), Australia (-4.3%) and New Zealand (-4.8%). 
Trade-reliant economies
Two of Asia’s most open economies, Hong Kong and Singapore, would also benefit from China’s nascent economic recovery. 
Euler Hermes predicts Singapore’s economy to come in at -5.1% for 2020, as the country gradually eases lockdown restrictions that had lasted for eight weeks – longer than many analysts had anticipated. 
Meanwhile, Hong Kong’s economy is expected to contract -5.9% this year as recovery in the tourism and retail sectors are curtailed by protests which had unexpectedly resumed amid the pandemic. 
As for the US reprisal against China’s implementation of the national security law, Ms Huang said: “The potential of the US imposing the same tariff hikes on Hong Kong as the ones applied in China should have a limited impact in the short term, and will not materially impact Hong Kong’s business environment.” 
Restoration of global trade still some time away
Meanwhile, global trade volume in goods and services contracted in 1Q2020 by -20% in USD value terms, equivalent to a massive $4.5tn of trade losses. 
“In value terms, we don’t see trade flows in US dollar terms coming back to pre-crisis levels to before 2022. We will see a faster recovery for goods rather than services, hence a return to pre-crisis levels for travel and transport services will not happen before 2023,” said Ms Huang. 
In terms of potential supply chain disruptions, Euler Hermes does not expect a rapid structural shift in supply-chain dynamics after the crisis, except for the medical and food sector.
“While the risk of reshoring or relocating exists, our baseline scenario assumes that policymakers would be talking the talk but not walking the walk.
“Shortening supply chains can create resilience, but it is costly in terms of logistics and labour.”
Legacies of COVID-19 to linger on
Looking ahead, Euler Hermes believes that GDP growth in the medium term will continue to be impaired by the legacies of the COVID-19 crisis, with rising political risk and excessive debt likely to be prominent. 
“People could become dissatisfied with weak government responses and/or mismanagement as the economic pain intensifies … there is therefore a high incentive among governments to increase the level of debt in order to tame social tensions, which in turn negatively impacts, alongside high uncertainty, the growth potential.” A 

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