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The Deutsche Bank Research team identify two main factors driving the near-term outlook for Asia Pacific’s three largest economies of China, India and Japan: “first, how quickly consumption recovers back to something approximating “normal” and, second, how quickly that happens in key export markets.
China is in a class of its own; the first economy both to enter near-total lockdown and also to emerge from it; hence it has achieved a V-shaped recovery with GDP estimated to have declined by -10.8% in Q1 2020 and rebounding by 12.5% in Q2, while exports (in USD terms) fell by 16% in the first quarter and rebounded by 18% in Q2. “Surging exports of medical equipment was a key factor,” the team notes.
“Such remarkable outperformance is unlikely to be repeated, but the US and Euro Area (EA) outlook for the second half of the year does suggest that export growth in China will likely be higher in the months to come.” However, looming on the horizon is the prospect of renewed conflict with the US on trade issues, not helped by the fact that US exports to China are running below the levels of 2017 rather than above – as China committed to in the Phase 1 deal agreed by the two countries in January this year.
By contrast, Japan is experiencing a second wave of the virus worse than the first wave that hit the country in March. After a sharp decline in Q2 GDP – forecast by the team at -7.5% quarter-on-quarter, they expect only a very weak recovery. “Social distancing is tightening again – mostly voluntarily so far – which is reversing the recovery in activity,” they comment. “Moreover, there simply isn’t the policy space to add more support to the economy that there is perhaps in other large economies.”
Japan is further hampered by a potential growth rate that is among the lowest among the major OECD countries. “Measured by when GDP returns to pre-Covid levels, Japan is expected to experience the slowest recovery among the major economies, achieving that milestone only in 2024.”
India’s story is little better, with its lockdown in March apparently delaying the spread of coronavirus rather than containing it. This is “likely both to have an outsized negative impact on Q2 GDP but also be followed by a relatively weaker recovery as the easing of social distancing restrictions doesn’t actually lead to a significant change in behaviour.”
The team, noting that “the Indian government has very little fiscal space to provide
stimulus to the economy” expect GDP in Q2 to show a -18% quarter-on-quarter decline and for the economy to recoup only about half of that loss in Q3.