Pandemic delivers 'triple shock' to developing EAP region

30 Sep '20

3 min read

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COVID-19 has delivered a ‘triple shock’ to the developing East Asia and Pacific (EAP) region: the pandemic itself, the economic impact of the containment measures and reverberations from the global recession brought on by the crisis, according to the World Bank’s October 2020 Economic Update for EAP, which advocates swift action to ensure the pandemic does not hamper growth and increase poverty for years.

Domestic economic activity is reviving in some countries that have so far contained the spread of the virus. But the region’s economy is heavily dependent on the rest of the world, and global demand remains subdued.

The region as a whole is expected to grow by only 0.9 per cent in 2020, the lowest rate since 1967. While China is forecast to grow by 2 per cent in 2020 boosted by government spending, strong exports and a low rate of new infections since March, but checked by slow domestic consumption, the rest of the region is projected to contract by 3.5 per cent, the report says.

Prospects for the region are brighter in 2021, with growth expected to be 7.9 per cent in China and 5.1 per cent in the rest of the region, assuming continued recovery and normalisation of activity in major economies linked to the possible arrival of a vaccine.

However, output is projected to remain well below pre-pandemic projections for the next two years. The outlook is particularly dire for some highly exposed Pacific Island countries where output is projected to remain about 10 per cent below pre-crisis levels through 2021.

Poverty in the region is projected to increase for the first time in 20 years: as many as 38 million people are expected to remain in, or be pushed back into, poverty as a result of the pandemic.

In the wake of COVID-19, EAP governments have, on average, committed nearly 5 per cent of their gross domestic product (GDP) to strengthen public health systems, support households and help firms avoid bankruptcy. However, several countries have found it hard to scale up their limited social protection programmes, on which they previously spent less than 1 per cent of GDP, and continued support will put pressure on government revenue bases, says the report.

The report cautions that without action on multiple fronts, the pandemic could reduce regional growth over the next decade by 1 percentage point per year, with the greatest impacts being felt by poor households, because of lower levels of access to healthcare, education, jobs and finance.

Public and private indebtedness, along with worsening bank balance sheets and increased uncertainty, pose a risk to public and private investment, as well as to economic stability at a time when the region urgently needs both.

Large fiscal deficits in EAP are projected to increase government debt on average by 7 per cent of GDP in 2020. The report calls for fiscal reform to mobilise revenue through more progressive taxation and less wasteful spending. In some countries, the stock of outstanding debt might already be unsustainable and require greater external support.

At the same time, the crisis is accelerating pre-existing trends in trade, including regionalisation in EAP, a relocation of some global value chains away from China, and faster growth in digitally-delivered services, but also increasing pressure to revert to protectionism, the report adds.

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