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Unlocking the lockdown: Asia Pacific’s road to recovery

Deloitte Voice of Asia, Edition 7

​We expect that Asia-Pacific economies, led by China, are poised to begin an economic recovery sometime in the third quarter—but downside risks still remain.

THE COVID-19 pandemic has upended the global economy, but what lies ahead if the pandemic recedes by May or June? Our report, Unlocking the lockdown: Asia Pacific’s road to recovery, explores the likely trajectory of Asia’s economic recovery, investment implications and impact on global supply chains.

China’s economy will recover strongly later this year, a welcome boost for the rest of Asia

The sharp contractions in January to February 2020 in fixed asset investment, industrial production, services production and retail sales translate into a roughly 12.4 per cent year on year decline in China’s GDP. With 70 to 80 per cent of businesses resuming work by the end of March, we expect GDP to have contracted by about 8 per cent in Q1 2020 and be flat in Q2.

China’s economy will remain sluggish in Q2 2020 as February’s sizable uptick in unemployment to 6.2 per cent weighs on household sentiment and thus private consumption. Additionally, although the People’s Bank of China has lowered the cost and expanded the quantity of credit to the real economy, banks have not passed all of this on to the areas of the economy that have been hit hardest—private sector small- and medium-sized enterprises (SMEs). We cannot therefore expect much from growth in the first half of this year.

However, the Chinese economy should recover strongly in the second half provided COVID-19 infection curves flatten in the United States and western Europe by late Q2, as capacity utilisation returns to normal and a bigger-than-expected stimulus lends a fillip to growth. With policymakers now averse to the type of large, “flood irrigation” stimulus deployed in 2008, we think the fiscal stimulus to be announced shortly could be enough to drive GDP growth above 3 per cent for 2020 as a whole.

Given the above, our base case is for a substantial acceleration in China’s economic growth in the second half of this year. Again, our assumption is that major developed countries will lag China’s recovery by around two quarters, barring a resurgent second wave of COVID-19.

Other Asian economies will be buoyed by monetary interventions and fiscal policies

Bold responses in other Asian economies will also help produce a strong second half in the region. Asian governments have announced wide-ranging monetary and fiscal interventions to cushion the worst of the pandemic’s effects and prevent a downward spiral in economic conditions. Monetary authorities have responded forcefully via large rate cuts, using off-scheduled meetings where necessary, reflecting the urgency of the situation. They have also gone beyond the traditional playbook of rate cuts and liquidity support to banks. On the fiscal side, governments have grasped that fiscal policy will have to do the heavy lifting in supporting growth, given the precipitous fall in global demand on which their economies rely.

In light of these measures, we expect that a very weak first half of the year is likely to be followed by a strong second half, laying the foundations for a vigorous revival of economic dynamism in 2021.

The big downside risk: Could financial stresses be crystallised even if broad aggregate demand eventually recovers? If so, who is most at risk?

The COVID-19 shock led to a severe “sudden stop” in capital flows to emerging markets. According to the Institute of International Finance, outflows in Q1 2020 alone reached US$83.3 billion1—much larger than during the peak of the global financial crisis—and were particularly accentuated for emerging Asian economies.

Despite central banks’ Herculean attempts to provide unprecedented liquidity support to markets, the sharp rise in the US LIBOR-OIS spread, a key gauge of banking sector risk, shows that financial stress remains elevated. Further bouts of financial turbulence are likely, which will unleash adverse impacts on Asian economies.

The region’s currencies, equities and bonds have already received a drubbing, but further declines are likely in the present “risk-off” climate—befitting their status as riskier parts of the investable universe. Yield differentials vis-à-vis developed markets have narrowed as the G3 central banks applied maximum monetary stimulus, but this will bring little reprieve for Asian assets, which are more sensitive to growth wobbles.

A global safe-haven rush into USD cash has pushed the currency to vertiginous heights, making it more difficult for emerging Asian economies to service their share dollar–denominated debt. Most emerging Asian economies are exposed: China (5.5 per cent of GDP), Korea (14.0 per cent of GDP), India (5.1 per cent of GDP), Indonesia (7.2 per cent of GDP), Malaysia (8.1 per cent of GDP) and Thailand (5.8 per cent of GDP).2

The maturity profile of Asian nonfinancing corporate debt shows a large chunk of bonds are due for repayment in 12 months or before. This is especially salient because refinancing will be more difficult than in previous years given current adverse market conditions, which are likely to persist through most of 2020.

Domestic stability could also be threatened as a toxic mix of sharply slowing growth, tightening financial conditions and existing high leverage in some jurisdictions amplifies the economic damage to come, putting banking sector stability to the test. According to the International Monetary Fund, 40 per cent of total corporate debt, or US$19 trillion,3 would not be serviceable even in a recession half as severe as the one during the financial crisis in 2009.

Nonfinancial corporate debt levels look large in Hong Kong (219 per cent of GDP), Korea (151.1 per cent), China (153.6 per cent) and Singapore (97.9 per cent).4 Household debt levels are elevated and form a large share of total private nonfinancial sector credit in Vietnam, Thailand and Malaysia, suggesting increased risk of a debt crisis in the household sector. A recession in property prices is also possible, which will further weaken the financial position of households, as a large chunk of their debt is typically in mortgage loans. This is exacerbated by the increased propensity for home ownership in Asia.

The absolute level of leverage is not the only factor at play. Equally important is the ability to service that debt, although we highlight the risk that income streams could evaporate quickly in a severe economic contraction. Looking at debt-servicing ratios and absolute leverage levels in tandem alters the picture, as high debt levels in Hong Kong and Korea are balanced by very high debt-service ratios. This leaves Malaysia and Thailand as the economies most at risk.

A potential challenge to the banking system could come if these factors indeed amplify the economic damage, with the notable example of Vietnam’s, where banks are running on thin capital buffers and nonperforming loans are underreported. The sharp slowdown in growth will put their fundamentals to the test.


Assuming that the worst of the COVID-19 crisis will be over in the key economic powerhouses of North America and western Europe by the early part of Q3 2020 and given the further boost from aggressive, broad-based countercyclical measures, we expect that Asia-Pacific economies, led by China, are poised to begin an economic recovery sometime in the third quarter. Certainly, however, downside risks still remain. In addition to the potential for financial sector instability described above, a renewed trade war is possible since it is unlikely that China can deliver on its promises to buy more US goods (an additional US$200 billion in 2020 and 2021). Even in the absence of a trade war, trade tensions between China and the United States could well be a long-term theme that is further complicated by domestic politics in both countries and the geopolitical overlay.

Deloitte Global Economist Network

The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The network’s industry and economics expertise allow it to bring sophisticated analysis to complex, industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

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Cover image by: Leon Xiang Cao

  1. Robin Brooks et al., Capital Flows Report: Sudden stop in emerging markets, Institute of International Finance, 9 April 2020, p. 3.

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  2. Census and Economic Information Centre data.

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  3. Larry Elliott, “Global economy faces $19tn corporate debt timebomb, warns IMF,” Guardian, 16 October 2019.

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  4. Bank of International Settlements data.

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