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 United States waited to act, as the president played down the seriousness of the virus and insisted his administration had it under control. Only in March did many governors impose stay-at-home orders on almost all Americans.
China began reopening parts of its economy in mid-February. 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 was.
Treasury Secretary Steven Mnuchin told Fox Business he anticipated “a very strong rebound later this year.”
But China’s two steps forward, one step back performance shows no recovery can gain steam before the pandemic is brought under control and 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.”
Before the coronavirus reached the United States in late January, the Federal Reserve projected the economy would expand by 2 percent in 2020, with unemployment ending the year at a half-century low of 3.5 percent.
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 of 15 percent, economists at Goldman Sachs said Monday. In a sign of how long the return to normalcy will probably take, the nonpartisan Congressional Budget Office projects the unemployment rate at the end of 2021 will be 9 percent.
The president and his team are more upbeat. In his daily White House briefings, Trump has repeatedly predicted 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 United States had “the best economy in the history of the world.”
Most economists expect the mandatory shutdown now affecting most Americans to cause a historic decline in second-quarter output. Goldman Sachs, for example, expects the economy to shrink at an annual rate of 34 percent by the end of June. Even with a sharp rebound in the third quarter, only a bit more than half of the fall in output will be made up by year’s end, the bank said.
“This will be a slow recovery overall as many workers will be displaced and businesses adapt to a period of lost revenue,” Bank of America economists wrote in a recent client note.
Roughly 10 million workers lost their jobs in the last two weeks of March, and several million more are expected to join the jobless ranks this week. The soaring unemployment rate will cut into consumer spending once the economy reopens, and high debt levels may force many companies to trim their investment plans. On Tuesday, ExxonMobil said it would reduce capital spending by 30 percent or $10 billion.
The president is eager to prove the doomsayers wrong. After initially floating the idea of lifting social restrictions in time for worshipers to attend Easter masses this weekend, Trump bowed to public health advice and embraced social distancing.
But speaking Sunday at the White House, he again betrayed impatience with the economic toll of the anti-pandemic campaign.
“We want to get our people back to work. Everybody wants to be back. We want to open up our country as soon as possible,” the president told reporters.
Trump may establish a task force to consider how the economy should be brought back to life, which could evaluate proposals for a rolling reopening based on geographic or demographic characteristics.
Recent comments by his top aides reflect the president’s frustration.
“We can get a pretty good snapback, a good snapback. That’s my hope. … The sooner we begin to reopen, the faster that snapback’s going to be,” Kudlow told reporters Monday.
China’s experience, thus far, 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, as consumers remain nervous about catching the sometimes fatal respiratory illness.
“People are back at work. But they’re not shopping. They’re not going to restaurants. They’re avoiding public places,” Williams said.
Large state-owned factories have returned to work more quickly than the small and medium-size businesses that are the backbone of both 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 leaned on landlords to defer rent payments, said Andy Rothman, an investment strategist with Matthews Asia.
“The recovery is well underway and seems to be picking up steam,” he said.
Investors have been cheered by signs of returning strength in the world’s second-largest economy. The official purchasing managers index rose in March to 52 from February’s record low of 35.7. In key manufacturing provinces such as Guangdong and Zhejiang, officials report 100 percent of large enterprises have resumed operations, according to Trivium, a Beijing-based consultancy.
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 percent of the year-ago level. By mid-March, it reached 52 percent, but today it is only 59 percent.
It may be July 1 before operations are back to normal, according to the German Chamber of Commerce in China. The Chinese economy this year will grow less than 3 percent, its weakest performance since 1976, S&P Global Ratings said Tuesday.
“The shape of China’s recovery is still unclear. 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,” said James McGregor, chairman of APCO Worldwide’s greater China business.
Port activity is almost back to pre-crisis levels in Shanghai, though it remains just 40 percent of normal in Wuhan, according to data from HawkEye 360, a Herndon company that tracks radio frequency transmissions from cargo vessels.
Public health policies remain an unavoidable economic impediment. James Zimmerman, an attorney with Perkins Coie in Beijing, recently had to dispatch an associate attorney for a mandatory court appearance in Hangzhou. But when she returned to Beijing after that one-day trip, she faced a mandatory 14-day self-quarantine.
“Things are not quite back to normal,” Zimmerman wrote in an email. “Isolation and quarantine are still very much a part of daily life in China.”
China’s return to work requires health safeguards that are beyond what is customarily found in U.S. workplaces. Chinese workers routinely wear masks and accept routine temperature checks before being allowed into office buildings or factories.
“That’s probably what we’ll have to go through,” said Craig Allen, president of the U.S.-China Business Council. “Even after we bend or flatten the curve, we’ll have to keep in place — probably longer than we’d like — a system of monitoring and very strict application of public health rules.”
Whenever Americans resume their pre-crisis routines, they will inhabit a different economy than the one that existed just a few weeks ago.
Some businesses will have expired, unable to survive an indefinite revenue drought. Consumers may opt to save more and spend less. Governments will probably stockpile more medical supplies and install fever scanners in public buildings and transit hubs, said Torsten Slok, chief economist for Deutsche Bank Securities.
But the chief lesson from the Chinese experience is one that Americans may resist: Patience is the key to regaining prosperity.
“The Chinese economy took a huge hit. The government focused first and foremost on restraining the outbreak,” said Scott Kennedy, senior adviser at the Center for Strategic and International Studies. “They have gradually turned on the taps. It’s just going to take some time.”