Emerging Asia’s uneven recovery
Overall, the economy is rebounding across emerging Asia at various paces. Activity has almost resumed to normal in China, Taiwan and Vietnam, due to early containment of the coronavirus. Other Asian economies have rolled out massive fiscal stimulus to support the recovery. But international trade will remain a drag. From the latest data, global trade plunged 17.7% year-on-year in May. The drag is more severe in emerging markets such as African, Middle Eastern and Latin American economies. Exports from the euro zone, on the other hand, expanded by over 10% for the month.
China’s economy showed a V-shaped recovery in Q2. GDP expanded by 3.2% year-on-year last quarter after a 6.8% contraction in Q1. The figure grew 11.5% quarterly in seasonally adjusted terms, as opposed to the 10% drop in Q1. The rebound was led by industry and construction. Meanwhile, the recovery in the service sector was slower. There are positive signs in the labour market, with the surveyed unemployment rate falling from 5.9% to 5.7%. This improvement will underpin income and consumer confidence.
For South Korea, GDP in Q2 fell sharply amid the outbreak. According to the data released, GDP fell by 2.9% year-on-year after having fallen 1.4% year-on-year in the previous quarter. The primary driver of the fall was exports of goods, which plunged 12.2% year-on-year, mostly due to declining shipments of motor vehicles (-33.3% year-on-year) and petroleum products (-48.2% year-on-year) amid low demand for big-ticket items and travel.
Looking ahead, we expect the economy to have passed the worst as South Korea’s exports (a popular barometer for world trade) showed signs of improvement starting in June. Trade data released for the first 20 days of July showed the export recovery continuing. In working-days adjusted terms, shipments for the cited period contracted by 7.1% year-on-year, an improvement from a 11% year-on-year decline for the whole month of June. The electronics sector, especially computer parts (+56.9% year-on-year), continued to outperform other sectors, suggesting a rebound in electronics exports regionwide. For instance, Taiwan’s exports of integrated circuits surged 27.4% year-on-year in June.
Nonetheless, the rebound will be a slow process given that external demand remains weak in most of South Korea’s major trading partners despite the prevalence of lockdown easing. South Korean shipments plunged to various destinations such as Japan (-21.9% year-on-year), the EU (-11.9% year-on-year), the US (-2.4% year-on-year) and China (-0.8% year-on-year) during the first weeks of July. In addition, external demand sees risk from the surge in the number of Covid-19 patients, such as in the US and Japan. Therefore we foresee a sluggish global export recovery, in which most Asian export-dependent nations see weak external demand for several months ahead.
Similarly, Singapore’s economy is likely to have bottomed out in Q2 before rebounding gradually over the second half of 2020. The country’s GDP shrank by 12.6% year-on-year for the three months starting in April. The decline stemmed primarily from the construction sector, as new infections are still high among the industry’s migrant workers. For the second quarter, the sector has plunged 54.7% year-on-year.
One bright spot: high frequency data like Apple Routing Requests showed that driving activity has returned to the baseline level of Jan 13 since June, when restrictions on work and leisure began to ease. Although sectors such as tourism and hospitality should continue to suffer, Singapore’s economy is expected to rebound faster than its regional peers due to the huge size of the government’s stimulus package (about 20% of GDP). Most of the measures, including tax deferrals, wage subsidies and working capital loans, have kept many Singaporean businesses viable amid the crisis.
With the recovery in the manufacturing sector and generous fiscal support, most economies passed the worst in Q2. Major downside risks include sluggish international trade and heightened uncertainty. The pandemic-hit global supply chain is subject to further pressure from the continued geopolitical and trade tensions between the US and China. This friction could lead to higher volatility in the market and risk-off sentiment. In the short term, the US dollar may appreciate from safe-haven flows as volatility increases. From now until the US election in November, President Donald Trump may pull more antics to divert attention from the epidemic in the country. On a longer horizon, we believe the US dollar is on a declining trend due to the Federal Reserve’s balance sheet expansion and a prolonged period of low interest rates.