After two months of a near-total lockdown in many parts of the country, China seems to be getting back to business, with important indicators like electricity and steel demand and auto manufacturing returning to levels not far from normal.
That raises a big question for Europe and the United States, which are only now suffering the full brunt of the coronavirus pandemic: Can they just swallow a horrific second quarter and bank on a healthy economic recovery in the rest of the year? In other words, are the world’s major economies still on track for what’s known as a V-shaped recovery, as most forecasters seem to expect despite their catastrophic projections for the second quarter? Or given the complete shutdown of entire industries—from airlines to restaurants—will big economies essentially flatline?
It’s a critical question, especially in the United States, where President Donald Trump wants to get back to business as usual after only a few days of partial measures to reduce social interaction and the spread of the coronavirus. On Tuesday, Trump said he’d like to have the economy up and running again by Easter, in mid-April, because it’s “a beautiful time.”
Looking at China, where the virus outbreak began—and where the attendant economic disruptions hit first and hardest—is like an imperfect peek at a time machine a few months into America’s future. In many ways, after about two months of often near-total shutdowns, especially in the outbreak’s epicenter of Hubei province, China is resuming something close to a normal level of activity—with things lamented before now being seen, grimly, as a ray of hope.
Shanghai and Beijing have seen a return to rush-hour traffic jams, with road congestion in most major cities creeping back to within a few honks of last year’s average. As Goldman Sachs has noted, air quality, briefly better during the shutdown, is turning nasty again as coal-fired power plants kick back into operation, while demand for heavy industrial items such as steel is already back to the levels of 2018-2019. Most of China’s big automakers have reopened their factories. Housing sales, while still below the levels of recent years, are ticking upwards.
“It looks like a fairly strong recovery” from the data we are seeing, said Robin Brooks, the chief economist at the Institute of International Finance. His team expects a sharp contraction in Chinese GDP in the first quarter, and then a solid rebound in the second—“as much of a V as you could hope for.” By the second half of the year, by many measures, Chinese growth looks set to resume.
“The basic message is that this was a sharp interruption, but then GDP should bounce back to more or less where it was before,” he said.
China’s apparent recovery is encouraging, but that doesn’t necessarily mean that Europe or the United States should expect to have their economies anywhere near mint condition in six weeks or so. Places in Asia that were hailed as models for their handling of the initial virus outbreak, such as Hong Kong, Taiwan, and Singapore, not to mention China, struggled with a second wave of (usually imported) infections soon after the earlier restrictions were lifted. That is a cautionary tale for countries like the United States, but also Germany and the U.K., that are trying to weigh the economic costs (and political practicalities) of a hard stop against the human cost of a partial resumption of normal activity.
“The Chinese experience doesn’t translate well—in the West, there is more of an emphasis on individual liberties, and the grip of the government is not so tight. That’s why there’s more of a debate over how much economic activity we should sacrifice, and you see that in Germany, in Britain, and the United States,” Brooks said. A quick return to work—as places like Hong Kong are learning—risks reigniting the spread of the virus, and a whole other round of widespread illness and economic dislocation.
But the bigger problem is that while parts of China, Inc., are getting back to business, a big chunk of the domestic economy is still missing in action as consumers restrain spending, especially on big-ticket items. And even while China is crawling out of the worst of the virus impact, its major export markets and trading partners in Europe and the United States are smack in the middle of an exponentially growing outbreak, threatening to kneecap any recovery China could begin.
“There’s been a significant recovery since February. My concern right now is the impact of the looming slowdown in Europe and the United States” on consumer spending, said Houze Song, a macroeconomist at the Paulson Institute. In theory, the economic pain at the beginning of the year should have just meant consumers put off purchases until later—the textbook definition of “pent-up demand” that would unleash later in the year in a torrent of growth-boosting purchases. Maybe not this year.
“So far, demand is struggling to return to previous levels,” Song said. “China’s experience actually casts doubt on this V-shaped recovery idea.” Far from forecasting booming second-half growth in China, he expects more bad news on the horizon.
“There will be a second dip—not as deep as the first one in January and February, but it will be significant,” he said.
What’s confusing about China’s return is that while automakers are more or less back in business, auto dealers aren’t—consumers aren’t buying. Factories may be reopening, but export markets are closing. That makes the tentative rebound hard to gauge.
“There’s an uneven pattern: On the production side of the economy, there are signs of life. Whereas the consumer side, that looks a lot softer,” said Neil Shearing, the chief economist at Capital Economics in London. “I’m not so sure we will see a V-shaped recovery.”
China’s experience offers a glimpse at what’s to come. Despite Trump’s eagerness to kickstart the U.S. economy by Easter and reverse the disastrous slide in stock markets, getting the economy back up to speed is not as simple as reopening factories and sending people back to work. For economies that are even more skewed toward consumption and services, like those of the United States and Europe, the potential damage to consumer confidence and lingering efforts at social distancing is especially important.
“We see a very shallow recovery [for the United States] in the third and fourth quarter,” said Brooks of the Institute of International Finance—on the order of 0.3 and 0.5 percent quarterly growth. “That isn’t a V. That is a lopsided V.”
Mitigating against those expectations of a big snapback in the second half of the year are all the unanswered questions about a second outbreak, about how consumers will respond, about how effective the rescue package working its way through Congress really will be. All those questions make it tough, for now, to make any firm predictions about the kind of recovery Trump desperately craves.
“We don’t know anything about resurgence during the flattening of the curve. Containment may last for longer. We don’t know how much of a shock there will be to individual behavior,” Brooks said. In the uncertain aftermath of the great financial crisis a decade ago, consumers in the United States and elsewhere put off purchases, paid down debt, and basically hunkered down—depressing the rebound in what amounts to two-thirds of any advanced economy.
“In the great financial crisis, precautionary behavior went up. The same could happen here,” he said.