As countries in Europe emerge from months in strict lockdowns, political leaders, investors, and economists are looking at what form their economy post-pandemic will take. Will economies recover as fast as they collapsed, taking the form of a “V-shape” as some first suggested, or will recovery to a “new normal” be more stretched out than initially hoped?
Many are looking attentively to the East for answers. The lockdown in Wuhan, China was officially lifted on April 8th marking the end of a series of restrictions on movement and business operations. While countries in Europe were still battling the worst of their outbreaks, cases in China were largely stable, thus enabling the economy to gain a head start in the race-to-recovery. So far, China’s swift micro-lockdowns and extensive testing appear to have been able to suppress outbreaks soon after they appear. As a result, the country has become a focal point in predicting how fast, or slow, economies might finally recover.
Is China’s economy recovering?
Some indicators point to a resurgence in growth across China’s economy. Fixed asset investment and industrial production have both recorded year-on-year increases since April. The Chinese government reported that GDP rose by 3.2% year-on-year in the second quarter of 2020 – impressive given the 6.8% contraction the previous period.
But not all analysis points to such a bullish outlook on the Chinese Economy. In an interview with the Harvard Gazette, Edward Cunningham and Philip Jordan from the University’s Ash Centre warned that “most analysis of China’s economic recovery is biased by the nature of China’s own economic reporting and state priorities.” A study from China Beige Book, who collect independent data on China’s economy, suggests that the economy may be headed for a full-year recession.
China’s official figures put its unemployment around 6%. This figure is highly contentious, however, as it includes neither rural nor migrant workers. If these two demographics were counted, economists at Société Générale suggest those unemployed could be as high as 80 million — making the official rate almost 16%.
If official figures are to be trusted, they indicate the potential for a V-shaped recovery. As previously mentioned, supply-side indicators such as fixed asset investment and industrial production are trending upwards. Much like Europe, however, consumer expenditure pulls the weight of GDP and therefore remains essential in any economic recovery. Here too, early findings report encouraging trends in the demand side of the economy with auto sales up 14.5% in May and 11.6% in June, recovering ground from the 79.1% drop in February.
What does this mean for Europe?
While unemployment in China may be as high as 16%, figures from the European Union’s Eurostat put the corresponding figure for the EU as a whole around 6.7% in May, up only 0.1% from the previous month. This stability is likely due to extensive furlough schemes across Europe which effectively incentivise firms to retain employees while the crisis plays out. In France, for instance, the government has provided a suite of fiscal support packages including a wage guarantee of 70% for furloughed workers, with the government paying employers 85% of the cost until October.
As a result of such social safety nets across the Continent, consumer spending may not take as much of a hit compared to China where such measures are less common. China’s fiscal response to the pandemic also pales in relation to many European countries. So far, Xi Jinping’s government has announced measures amounting to only 4.2% of GDP. Germany, notoriously known for its fierce austerity, announced fiscal measures amounting to more than a third of GDP. On the 21stof July, European leaders also reached a landmark deal which set out a €750 billion recovery fund.
Nevertheless, while the IMF expects China’s economy to grow by 1% given its head start, the European Commission expects EU GDP to contract by 8.3%. A fiscal stimulus, as well as strong social-safety nets across Europe, will not avert inevitable job losses entirely but will help to curtail the effect once government support ends.
The Commission’s report emphasizes the assumption that the worst of the virus has passed. However, in recent weeks cases have been rising across Europe. In Spain, new cases have more than quadrupled since June 21st. This uptick has led to reports of increased booking cancellations, threatening tourism’s delicate recovery, which contributes 16% of Spanish GDP. Perhaps European countries, taking a note from China’s continuous mitigation of the virus, should recognise that economic recovery comes only after there is a perception of Covid-19 being under control. Despite a reopening of the economy and widespread financial stimulus, Europe’s, and admittedly the world’s, biggest and perhaps most looming threat remains a second-wave.