The Covid-19 recovery will be a slow and long-drawn process, but there are currently no signs of a double dip recession ahead for Asia ex Japan (AxJ), says a team of Morgan Stanley economists. This is despite a recent uptick in Covid-19 cases in the region, which has seen some retightening or extension of Covid-19 containment measures. 

“Hong Kong appears to be facing a third wave, and in China, daily new cases have picked up with the emergence of new clusters in Xinjiang and Dalian. Meanwhile, Covid-19 risks are still most significant in economies such as India, Indonesia and the Philippines, where daily new cases have continued to rise, with less discernible signs of having peaked,” note Tan Deyi, Zac Su, Jin Choi and Jonathan Cheung in a broker’s report issued on 4 August.

Nonetheless, the economists argue that the 2Q2020 has marked the trough in GDP performance for most of AxJ, which data shows largely came in April-May 2020. They expect 3Q2020 to be one of continued recovery for economies that have successfully dealt with Covid-19. July manufacturing Purchasing Managers’ Index (PMI) continued to rise in AxJ while AxJ export numbers through June remained constant, with South Korea’s export value and  volume recovering 93% and 95% respectively.  

In fact, growth momentum has persisted even in countries where Covid-19 cases have begun rising again. Weekly power demand is back in positive territory in India while weekly unemployment levels have remained at pre-Covid levels despite a spike in April to June 2020. Meanwhile, Indonesia and the Philippines have seen second-order derivative improvements up to June. 

“Despite concerns about the impact from rising daily new cases and retightened containment measures, our initial reading of 3Q20 indicators suggests that a gradual cyclical recovery and not a double-dip is under way. Our base case is for the quarterly GDP profile for AxJ to show a gradual cyclical recovery in the next 12-18 months,” say the economists. 

The reason for this optimism is the relatively strong AxJ response to Covid-19, with aggressive tracing, contact tracing and containment effectively controlling infections in most countries. Aware of the economic ramifications of a full-scale lockdown, policymakers will also avoid a repeat of such a scenario going forward, instead using localised or selective lockdown measures to minimise downward pressures on growth. 

A strong policy response to the Covid-19 recession will also aid cyclical recovery. About 9% of GDP has already been announced in AxJ to combat the impact of Covid-19. With fiscal policy being the more effective policy tool, AxJ fiscal deficits are expected to rise to around 12.7% of GDP in 2020,  exceeding both the 8.1% recorded in 2019 and 10.3% in 2009