China’s woes hint at sluggish economic rebound

Two of President Donald Trump’s closest advisers on Tuesday predicted that the economy will roar back to life later this year, despite China’s sluggish recovery from the coronavirus.

With China’s monthslong outbreak apparently contained, most factories and businesses there have reopened. But fears of a fresh wave of infections led the government last week to reimpose travel restrictions in Wuhan, where the pandemic began, and order the closure of several hundred movie theaters that had just reopened for the first time since January.

Earlier today, the government lifted its lockdown of the city, but the halting Chinese recovery offers sobering lessons for U.S. policymakers about what is shaping up to be a more protracted economic convalescence than the White House wants, according to business executives and economists.

“A V-shaped recovery seems to be really difficult to envision,” said James Green, senior adviser at McLarty

Associates and a former U.S. diplomat in Beijing. “The lesson of the Chinese experience is: It’s going to be slow going.”

In late January, as the coronavirus began galloping across China, the government in Beijing imposed an unprecedented lockdown on the 60 million people in central Hubei province. The quarantine, later broadened to other areas, eventually succeeded in curtailing the spread of the illness. But it sent China’s economy, the world’s second largest, into a tailspin with investment declining in the first two months by nearly one-quarter.

The U.S. waited to act; the president played down the seriousness of the virus and insisted that his administration had it under control. Only in March did many governors impose stay-home orders on most Americans.

China began reopening parts of its economy in midFebruary. As the pandemic nears its peak in the U.S., Trump administration officials are racing to do the same.

Larry Kudlow, the director of the National Economic Council, said the economy could be reopened “in the next four to eight weeks” and would perform like “a dynamo” when it is.

Treasury Secretary Steven Mnuchin told Fox Business that he anticipated a strong rebound later this year.

But China’s performance shows that no recovery can gain steam before the pandemic is brought under control, or before measures to prevent a future outbreak — including widespread public health monitoring — are implemented. Even if those conditions are met, the collapse of many businesses and enduring changes in consumer behavior are likely to reshape the economy, altering investment, spending and saving patterns.

“The U.S. economy is going to rebound, once some of the restrictions are lifted. But it’s going to take a long time to get back to where it was,” said economist Mark Williams of Capital Economics in London. “When you fall a really long way, you can bounce. But I wouldn’t expect the U.S. to be back on the path it was on for at least another year or two.”

NEW PROJECTIONS

Before the coronavirus reached the U.S. in late January, the Federal Reserve projected that the economy would expand by 2% in 2020, with unemployment ending the year at a half-century low of 3.5%.

Instead, U.S. output over the next two years will be $3.3 trillion less than what was anticipated and the jobless rate will touch a post-World War II record 15%, economists at Goldman Sachs said Monday. In a sign of how long the return to normalcy may take, the nonpartisan Congressional Budget Office projects that the unemployment rate at the end of 2021 will be 9%.

The president and his team are more upbeat. In his daily White House briefings, Trump has repeatedly predicted that the economy will perform “like a rocket ship” once the virus is corralled.

“I think we’re going to have a tremendous rebound. There’s a great energy and a great pent-up demand,” he said April 1, adding that before the pandemic, the U.S. had “the best economy in the history of the world.”

China’s experience offers a cautionary tale.

As the Chinese emerged from quarantine, factories reopened more quickly than restaurants and retail outlets. Any business that relies on person-to-person contact is suffering because consumers remain nervous about catching the sometimes fatal respiratory illness.

“People are back at work,” Williams said. “But they’re not shopping. They’re not going to restaurants. They’re avoiding public places.”

Large state-owned factories have returned to work more quickly than the small and medium businesses that are the backbone of the Chinese and U.S. economies. Like the Trump administration, which has rolled out a new $349 billion loan program, Chinese officials sought to help small businesses stay alive. Beijing suspended social security and medical fees that are automatically deducted from companies’ accounts, and it leaned on landlords to defer rent payments, said Andy Rothman, an investment strategist with Matthews Asia.

Yet roughly nine weeks after the authorities began urging people to return to work, many Chinese factories are just treading water. They are open for business but lack orders. Major exporters are especially troubled since their U.S. and European customers have been idled by the pandemic.

Lingering Chinese weakness is evident in a Capital Economics index that blends measures of power station activity, property sales, subway ridership and long distance travel. In mid-February, as the government began pushing people to resume work, the index stood at 22% of the year-ago level. By mid-March, it reached 52%, but today it is 59%.

“The shape of China’s recovery is still unclear,” said James McGregor, chairman of APCO Worldwide’s greater China business. “The government is trying to architect a fast and bold recovery, but as factories ramp back up, they are finding demand for their products outside of China has dissipated.”