The latest Q2 GDP figures show diverging depths of downturns between EMs (outside China), which can largely be explained by differences in the severity of virus outbreaks and the stringency of lockdowns. Recoveries are following this pattern too. China’s economy is on the path to normality, while others (India, Philippines and much of Latin America) are lagging as new virus cases remain high.
- The latest Q2 GDP figures show diverging depths of downturns between EMs (outside China), which can largely be explained by differences in the severity of virus outbreaks and the stringency of lockdowns. Recoveries are following this pattern too. China’s economy is on the path to normality, while others (India, Philippines and much of Latin America) are lagging as new virus cases remain high.
- A handful of EMs have now released Q2 GDP figures. China’s economy bounced back strongly after its Q1 slump, while all other economies contracted. This ranged from small 0-1.5% q/q falls in Hong Kong, Vietnam and Taiwan, to 15-20% q/q slumps in Mexico, Malaysia and the Philippines. Russia and Central and Eastern Europe lay somewhere in between. (See Chart 1.) For the emerging world as a whole (excluding China), we estimate that GDP fell by a record 10.5% q/q in Q2. (See Chart 2.)
- In general, differences in the depth of downturns in Q2 can be largely explained by the length and stringency of lockdowns. Chart 3 shows that the q/q changes in Q2 GDP in major EMs (our estimates where figures are not yet available) are correlated with Oxford University’s Government Response Stringency Index for each country during the quarter. Those to the top left (notably Peru and South Africa) maintained strict lockdowns as they were unable to control their virus outbreaks, leading to bigger slumps.
- The falls in GDP were smaller in Korea and Hong Kong, as their outbreaks had been quickly contained and restrictions were relatively loose. Note that EMs lying well below the dotted line in Chart 3, such as Taiwan and the Czech Republic, had larger contractions than may have been expected given the relatively light-touch restrictions there. These open economies seemingly took a big hit from faltering external demand.
- Turning to the latest monthly data, the good news is that recoveries accelerated in June. Industrial production rebounded particularly strongly in Latin America and Emerging Asia (ex. China) as factories reopened, though it was still down 5-10% y/y in all major EM regions. (See Chart 4.) It’s a similar story for retail sales, although those in Emerging Europe have been more resilient, down just 2.3% y/y in June. (See Chart 5.) That reflects policymakers’ success in containing the virus, which allowed restrictions to be loosened. It also helps that, unlike in industry, retailers are less exposed to weak external conditions.
- Elsewhere, China’s economy continued to strengthen in July. Activity and spending picked up (see Chart 6.), led by state-driven capital investment. The weaker pace of recovery lately suggests that the initial boost from re-opening is fading – a trend which we will probably see in other EMs. That said, we think that greater policy support will help to drive China’s economy back to its pre-virus path by year-end.
- The recovery in other EMs won’t be as rapid. Indeed, in some economies, a renewed surge in virus cases has already put a brake on activity in Q3. As we highlighted in the last Activity Monitor, there were early signs that recoveries were stalling as higher virus caseloads prompted a tightening of restrictions. That has recently occurred in Hong Kong, Vietnam, Colombia and the Philippines, and our high-frequency Mobility Trackers suggest that activity has weakened in these EMs in the past month. (See Chart 7.)
- Meanwhile, relatively stringent lockdowns and/or consumers’ own precautionary behaviour has kept activity depressed in countries still grappling with the virus, including much of Latin America and India. (See Chart 8.) That’s unlikely to change unless policymakers can get a grip on their outbreaks.
- Bring this together, the key point is that economies able to control their virus outbreaks outperformed in Q2, and will experience the fastest (and smoothest) recoveries. Outside mainland China, that suggests Taiwan and parts of Emerging Europe will outperform over the coming quarters. For these economies, as has already been the case, weak external conditions will probably be the biggest headwind.
- Finally, it’s worth noting that the development of a vaccine is unlikely to alter the near-term picture. Admittedly, the production of a vaccine may offer some light at the end of the tunnel, particularly for countries unable to control the virus through policy measures alone. But doubts over the efficacy, production and distribution of vaccines means that we are hesitant to change our GDP forecasts at this stage. (See our Global Economics Update for more.)
Chart 1: Reported Real GDP (% q/q)
Chart 2: Real GDP (% q/q)
Chart 3: Q2 GDP & Government Stringency Index
Chart 4: Industrial Production by Region (% y/y)
Chart 5: Retail Sales by Region (% y/y)
Chart 6: China Activity & Spending Indicators (% y/y)
Chart 7: Selected CE Mobility Trackers*
Chart 8: CE Mobility Trackers* (Latest = 15th Aug.)
* Trackers show % diff. from Jan.-Feb. 2020 median level, 7d MA.
Sources: Refinitiv, Oxford University, Google, Apple, Moovit, CE
Nikhil Sanghani, Assistant Economist, email@example.com