In an interesting article dated the end of July, The World Bank released its forecast for the China economy. Apparently it has revised down its estimate of 5.9% growth which it predicted at the start of Covid, around end of December 2019. We think most analysts had already agreed that was never going to happen. Its new figure of 1.6% growth is in line with the IMF guess a few weeks earlier and the last China Economic data for the the first 6 months of 2020. Hardly any surprises there.
However, what is a little surprising is the expectation that China’s economy will grow 7.9% next year – 2021. Despite citing unusually high risks from the uncertainty of the epidemic and economic recovery. This comes on the back of the previously mentioned IMF report that found the US economy is set to contract around 6% for 2020.
Will we see the US pull out of both of those institutions?
The major damage to the US economy was the haemorrhaging of the retail sector as the US economy is heavily dependent on domestic consumption. Whereas in China, the same domestic consumption kept its economy going. Of course, there was a huge amount of luck for China in that it was right at the start of the 2 week Chinese New Year holiday when many businesses, factories, schools etc had already shut down. The flip side of that was it meant it took them too long to get organised costing valuable time.
However, in retrospect, whether or not that would have played a significant part in the current situation is debatable as even after the WHO gave several strong warnings of a pandemic, the world generally also failed to respond in a timely and organised manner.
Two possible reasons for the World Bank and IMF confidence in China’s economic bounce back may be:
1/ E-retail, digital currency, contactless payments via WeChat pay or Alipay are extremely well established and supported by consumers throughout China compared to the US. Data would suggest more people switched from B&M shopping to online during the early days of the virus in China.
2/ China took a test, mask, and social distance approach rather than blanket lockdown. This, coupled with E-com delivery services being classed as essential meant that online shopping was not hobbled and B&M shopping was able to creep slowly back.
To complicate matters further, amid investor worries that a US economic recovery might be stalled by the country’s inability to stem the spread of Covid the Dollar posted its biggest monthly decline in 10 years at the end of July 2020. As the dollar fell to a 2 year low of 92.597, the Euro bounded back to a two year high of $1.1905. To put that into comparative percentage terms, July 2020, the dollar has lost 4.9% whereas the Euro has gained 5.8%. That incidentally, is the biggest gain for the Euro in 10 years. You can read a detailed account here.
This metric could play well for the US as exports become more competitive and imports more expensive. Both good stimuli for the US manufacturing and domestic consumption. However, whether these are enough to offset the down side of a weak currency is debatable, especially long term.
This could all be a moot point as some parts of Europe are struggling again with a resurgence of the virus. China is also fighting a Covid comeback with an increase of cases seemingly entering the country via the packaging and containers of imported seafood. However the US economy woes, dollar v/s Euro may have some bearing on the closer cooperation we have seen between China and Europe in the latter part of this year.
You can read the full article re the World banks prediction here
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