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East-west divide: winners and losers in the Covid economy

East-west divide: winners and losers in the Covid economy

by Robin Harding, Ben Hall and Davide Ghiglione 4 min. 11.10.2020 From our online archive
Asian nations’ early action to stem virus spread contrasts with Europe’s struggle
People walk on a street closed to motorists on Sundays in Tokyo's Ginza district on October 11, 2020 Photo: AFP
People walk on a street closed to motorists on Sundays in Tokyo's Ginza district on October 11, 2020 Photo: AFP

For Remigio Brunelli, managing director in China for the Italian sportswear group Tecnica, Covid-19 feels almost like a bad memory as life in Beijing returns to normal and consumers regain their confidence.

The difference between Europe and China is palpable, Mr Brunelli said. “Uncertainty is still running high in the old continent [Europe], and we expect it to last for another six or 12 months at least. In Asia, on the other hand, and particularly in China, there is confidence.”

His comments show how different approaches to the pandemic are now leading to sharp divergences in outcomes, with China, Taiwan and other Asia-Pacific economies on course to grow in 2020, even as countries where coronavirus has become endemic suffer severe contractions.

They also highlight an important question for 2021: can East Asia, which traditionally relies on customers in Europe and North America to fuel its growth, instead become a source of demand for the rest of the global economy?

While Europe enjoyed a strong rebound in the third quarter, its recovery is starting to run out of steam as coronavirus infections rise again across the continent.

Although European capitals are loath to reintroduce the national lockdowns imposed in March, they are targeting restrictions on hospitality, entertainment and travel.

“No government wants to go back to where they were in March given the impact on the economy,” said Melanie Debono, European economist at Capital Economics. “But any restrictions may take longer to unwind so the virus doesn’t uptick again.”

By contrast, countries in the Asia-Pacific region – including New Zealand and Vietnam as well as Taiwan, South Korea and China – suppressed Covid-19 to lower levels and then maintained tighter controls against a resurgence. While Europe enjoyed its summer holidays, Asia kept international travel on hold.

Taiwan closed its borders early and followed that up with well-organised contact tracing, quarantine and social distancing to eliminate a few initial clusters. South Korea was slower to halt travel, but mass testing and tracing keeps new cases below 100 a day. Neither country ever needed a lockdown.

China, meanwhile, suppressed the initial outbreak of coronavirus in Wuhan to zero and continues to tackle any new case aggressively. An outbreak in Beijing over the summer prompted strict local lockdowns, controls on leaving the city and mass testing until it was wiped out. The world’s most populous country and the origin of Covid-19 now reports only a handful of cases a day.

The economic result is that people can act without fear of the virus: one can go to the pub in Wellington, the swimming pool in Wuhan or the office in Hanoi. “Where we have seen policies to contain the virus, people have quickly returned to normal,” said Frederic Neumann, co-head of Asian economics at HSBC in Hong Kong.

While China’s economy is picking up overall, that is largely owing to infrastructure and exports. “When you look at consumption, it’s true that’s lagging,” said Mr Neumann, who noted that luxury goods in China are recovering strongly but broader retail sales are struggling.

As well as avoiding the hit to domestic demand from continuing fear of Covid-19 – affecting Japan as well as Europe and the US – the manufacturing hubs of Asia have benefited from a shift to consuming goods instead of services. The industrial economies of Germany and northern Italy are also enjoying the trend.

Intense global demand for medical goods, such as masks and gowns, and working-from-home necessities, such as personal computers, has rippled through Asian supply chains. With Europe and North America providing cash to furloughed workers, it is the open-for-business Asian economies that can meet their demand for manufactured goods.

That leaves two big issues. First, Asia’s success depends on finding an effective vaccine for Covid-19. If no vaccine materialises, then Asian populations will remain vulnerable, and initial success in preventing the spread of the virus could turn into permanent border restrictions to keep it out.

Second, it is unclear where demand will come from to sustain the global recovery in 2021 and beyond. While domestic economies in Asia have kept going, they are still suffering from the closure of tourism and rely on global demand for goods.

With US fiscal stimulus in doubt, Asian manufacturers may start to suffer from a more conventional recession.

For Mr Brunelli, though, China is still a better bet than Europe. Although his company registered a year-on-year sales drop of around 25 per cent globally during the most critical phase of the pandemic, he expects to end the year with sales down just 10 per cent in China.

“Uncertainty in Europe is mainly linked to the spread of the epidemic. We don’t know if and to what extent there will be other lockdowns and that certainly doesn’t help,” he said.

“Here in China we saw the number of new cases go down to zero, especially in big hubs, and the way the pandemic has been handled has been very effective, which is helping to drive demand and is a very good starting point for doing business.”

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