The World and China's Economy under the COVID-19 Pandemic
©Hu Angang, Dean, Institute of Contemporary China Studies, Tsinghua University
I. The disease has spread to become a major pandemic
Since the initial outbreak in January this year, COVID-19 has spread around the world to become a pandemic. As such, it poses a threat to every individual across the globe.
During the incubation period of the epidemic, the world did not make sufficient preparations, nor did countries and regions fully utilize the window of opportunity offered by China in its fight against the disease in the early stage. Now, more than 200 countries and regions are at different stages of the outbreak. As the exponential growth in the cumulative number of confirmed cases and deaths exceeds the coping capacity of existing medical resources, even the most developed countries are powerless, let alone the least developed countries.
Europe and the United States have become the largest centers of the pandemic, while southern regions such as Africa, Central America, and South America are still in the early stages of the outbreak. However, although southern countries currently account for less than 1/5 of the total number of confirmed cases, given their dense population, they may soon surpass Europe and the United States to become new centers of the disease. The world is confronted with an unprecedented common enemy. Unless international cooperation is facilitated, mankind may be dragged into a protracted battle, ranging from a year or two to a longer period of time. Among all countries, China has taken the most comprehensive, strict, and thorough measures in the prevention and control of the Covid-19 outbreak, and has done so in a timely manner. It took only two months to effectively control the rampant spread of the disease, and China has now entered the stage of normalized prevention and control.
II. The world economy has entered a stage of great crisis
The Covid-19 pandemic, as the largest gray rhino event ever experienced, has directly led the world economy into a cliff-like recession.
According to the International Monetary Fund's World Economic Outlook (released in April 2020), the world GDP growth rate fell from 2.9% in 2019 to -3.0% in 2020, a year-on-year decrease of 5.9 percentage points. The U.S. GDP growth rate alone fell from 2.3% in 2019 to -5.9% in 2020, a year-on-year decrease of 8.2 percentage points. The euro zone fell from 1.2% to -7.5%, a decrease of 8.7 percentage points. Meanwhile, Russia fell from 1.3% to -5.5%, a decrease of 6.8 percentage points. Among the G20 countries, only China and India maintained positive growth, at 1.2% and 1.9% respectively, a significant decrease from the previous year. It is estimated that in 2020 and 2021, the pandemic may cause a loss of approximately USD 9 trillion to the world economy, exceeding the combined GDP of Germany and Japan. In addition, a World Trade Organization report released this April predicts that global merchandise trade will be reduced by 13-32% in 2020.
Moreover, unemployment is increasing rapidly worldwide, and will hit a record high. Due to the inevitable closure of workplaces and the decline in demand caused by the prevention and control measures, very many different jobs have been severely hit. The International Labor Organization (ILO) estimates that among the world's 3.3 billion employed people, 2.67 billion will be affected due to the complete or partial closure of more than 81% of workplaces. The number of people receiving unemployment benefits in the United States has reached 26 million, a record high. The unemployment rate is likely to rise again sharply from the 3.7% in 2019 to match its peak in 2009 (9.3%).
Almost all G20 countries have experienced “three declines” (economic growth, per capita income, and trade growth) and “three increases” (unemployment rate, fiscal deficit rate, and inflation rate). The rate of change will greatly exceed that of 2009 when international financial crisis occurred, and will drive the world into economic recession, or even worse, world economic depression.
The Covid-19 crisis has also impacted social development. For example, more than 1.6 billion students in 161 countries around the world have been forced to interrupt their school studies. In China, during the most severe period of the epidemic about 270 million students (including pre-school education) were directly influenced and had to take online classes.
III. The Chinese economy first declined and will recover rapidly
China's economic growth will be a typical V-shaped curve, from positive growth to negative growth, then recovery and a return to positive growth.
In the first quarter of 2020, China's economic growth experienced a rare steep decline. The economic growth rate in the first quarter was -6.8%, a decrease of 13.2 percentage points from the same period last year (6.4%), and the total volume of GDP decreased by approximately USD 410 billion, another historical record. Meanwhile, as the world's largest trading country, China's imports and exports of goods decreased by 11.4% in the first quarter, a 15.1 percentage point decrease from the same period last year (3.7%), and is expected to continue to decline in the future. The number of unemployed people in urban areas in China has increased by 4.43 million, and the actual weekly working hours among employed people have decreased significantly.
Since China has taken the most stringent prevention and control measures in the world and has made quick decisions, it has obtained the initiative to restart the economy ahead of the rest of the world. From mid to late February, in addition to Hubei Province, various low- and medium-risk areas across the country have resumed work and production and reopened their businesses. As of April 14, the average operating rate of industrial enterprises above designated size in the country had reached 99%, and the rate of reinstatement of personnel had reached 94%. The entire economic development is returning to the growth track.
Most importantly, the Chinese government has decided to implement a strategy of actively expanding domestic demand to hedge against the economic downturn and to revive the Chinese economy. Specific measures include, first of all, implementing a more proactive fiscal policy. In particular, China has raised the fiscal deficit rate, expanded the issuance of special national bonds and local government debt, and accelerated the implementation of tax and fee reduction policies during the outbreak.
Secondly, China aims to create a strong domestic consumer market to stimulate and upgrade consumption. We will build comprehensive consumer networks covering both urban and rural areas, accelerate the construction of a “smart +” consumer ecosystem, and promote new formats and models of consumption. Thirdly, China is focusing on seven major areas of investment, namely, transportation infrastructure; energy projects; agriculture, forestry, and water conservancy; ecological environmental protection projects; people’s livelihood services; cold chain logistics facilities; and municipal and industrial park infrastructure. Furthermore, China is accelerating the construction of five new types of infrastructure for 5G networks, data centers, artificial intelligence, and Internet of Things, among others. Finally, China has prioritized pro-employment policies to create the world's largest growth of employment. It will increase the average weekly working hours per capita, including working hours at home and online, thereby increasing labor compensation.
We expect positive growth will occur in the second quarter of 2020, and China will recover its growth rate of more than 6% in the third and fourth quarters. The growth rate throughout the year will remain at more than 2.0%, making China one of the very few world powers that can maintain a positive economic growth in 2020. The year 2021 is the first year of China's “Fourteenth Five-Year Plan,” according to which China will aim to achieve a GDP growth rate of about 5% in that year. In other words, China will continue to be the engine of world economic growth, driving the world economy out of recession.
©Hu Angang; CTS-UAM; ciencialibertad.org.