China keeps bouncing back while Europe slips into second wave

Chief Economist's View

Download the PDF version including our economic update by region here:  China keeps bouncing back while Europe slips into second wave

This week saw the release of the September quarter Chinese national accounts that showed GDP grew by 2.7% in the world’s second largest economy to be up 4.9% over the year. This follows a whopping 11.7% recovery in the June quarter and means that the Chinese economy is already 3% bigger than its pre-COVID level of the December quarter of 2019.

The recovery is also proving to be broad based, with rising momentum across industrial production, retail sales, fixed asset investment and property investment. This is good news for Australia, with China being our largest trading partner and iron ore and metallurgical (met) coal, two of our largest exports.

While China dominates our news due to its importance to our economy and its significant role in the global economy, less attention is paid to the performance of the rest of our region. Despite being the source of the disease and accounting for 60% of the world’s population, the Asia Pacific region has performed relatively well, both in terms of coping with COVID-19 and economic growth.

As we know, Chinese authorities have unleashed a sizeable stimulus program with a focus on infrastructure spending and support of their property market, which has increased steel production. This, in turn, has led to the increase in demand for iron ore and met coal; driving a 50% increase in iron ore prices since March and maintaining steady prices for met coal.

Only four of the top 20 nations in terms of total the total number of COVID-19 infections are from our region. India, of course, is in that group, ranked 2nd behind the US, but the other three – Bangladesh, Indonesia and the Philippines – are ranked just inside the 20 at 18, 19, 20.

These four countries are also among the worst performing economies. At the other end of the spectrum are Taiwan, Vietnam and Thailand that have maintained extremely low COVID-19 case rates throughout the pandemic, and Taiwan and Vietnam (along with China) are among the very few economies globally that are likely to have positive year average GDP growth in 2020.

Of the other major economies in the region, most have had either late spikes in COVID-19 case rates or serious second waves that they are gradually bringing under control. Fortunately, many of these countries, such as South Korea, Indonesia and Sri Lanka, are experiencing relatively mild hits to their economies, although others will undergo an economic fallout more in line with Europe and the US, including Singapore, the Philippines, and Japan.

During the week, we also witnessed the continuing deterioration in the COVID-19 pandemic in Europe, which is now firmly in the grip of a second wave with daily case rates exceeding their early first-wave peaks of February and March. Much has been made of the low death rate accompanying this second wave, and although the death rate is rising and typically lags the rise in infections by a few weeks, it is unlikely that the number of deaths will rise to the levels seen earlier in the year.

Nonetheless, the sheer size of daily case rates has seen a sharp spike in the number of people requiring hospitalisation with health systems coming under strain. ICU beds are filling up and many countries are beginning to limit or suspend elective surgery.

Curfews to limit public movement have been imposed in parts of Spain, Italy and France. Wales has gone into a two-week lockdown and Northern Ireland and Scotland have closed their borders. While the rise in case rates in the UK, France, Spain and Italy have been well publicised, smaller less-publicised European countries are also suffering.

Countries such as Luxembourg, Czech Republic, Belgium, Switzerland and Austria, have recent case rates per population around 2 to 3 times that of the US, Spain and Italy. The experience of Europe, which opened their borders and economies rapidly in the Northern Hemisphere summer is a sobering example of the fate that could await Australia over our coming summer if extreme care in social distancing and attention to hygiene is relaxed.

Table 1: Financial market movements: 15 - 22 October 2020

Source: Bloomberg