Developing Asia Headed for L-shaped Recovery

Video | 15 September 2020

NOTE: economic forecasts have since been updated: see the Asian Development Outlook (ADO) series

As a result of the COVID-19 pandemic, developing Asia will contract for the first time in nearly six decades in 2020, setting back efforts to lift hundreds of millions of people out of poverty, says ADB's Chief Economict Yasuyuki Sawada.

Growth is forecast to rebound to 6.8% in 2021, but this is partly due to the comparison with a very weak 2020, meaning that the recovery will not be V-shaped, but more likely an L-shaped or 'swoosh-shaped' recovery. And the path to recovery remains precarious.

A prolonged pandemic—in the form of an extended first wave in some economies, or recurrent waves of outbreaks in others—is the main risk to the outlook. It would lead to protracted containment measures and precautionary behavior, with associated supply- and demand-side disruptions. This would leave lasting scars, erode economies’ productive capacity, and possibly result in financial crises.

Transcript

Question: How has the COVID-19 pandemic impacted economies in Asia and the Pacific?

Yasuyuki Sawada: The COVID-19 pandemic has taken a huge toll on our region and on the world.

It has cost thousands of lives and put a heavy burden on our economies.

The region’s economies have been affected via various channels, from steep falls in domestic demand due to lockdowns to plunging exports and tourism due to the global nature of the pandemic.

As a result, developing Asia will contract for the first time in nearly six decades this year.

This has set back efforts to lift hundreds of millions of people in our region out of poverty.

Question: Is the impact similar across the region or are there significant differences across economies?

Yasuyuki Sawada: There is quite a divergence across the region. In East Asia, the outbreak has been largely contained and activity is picking up. In fact, the People’s Republic of China is expected to still grow this year, by 1.8%.

But in other economies in South Asia, Central Asia, and Southeast Asia, outbreaks are not yet under control.

Containment measures are still partly in place, depressing economic activity. And while the Pacific economies have avoided having significant outbreaks, the collapse of global tourism has hit those economies hard, leading to double-digit contractions.

Question: What kind of recovery are you expecting?

Yasuyuki Sawada: Growth is forecast to rebound to 6.8% in 2021, but this is partly due to the comparison with a very weak 2020.

GDP next year will still be substantially below expectations before COVID-19. This means the recovery will not be V-shaped, but more likely an L-shaped or “swoosh-shaped” recovery.

And the path to recovery remains precarious.

A prolonged pandemic—in the form of an extended first wave in some economies, or recurrent waves of outbreaks in others—is the main risk to the outlook. It would lead to protracted containment measures and precautionary behavior, with associated supply- and demand-side disruptions.

This would leave lasting scars, erode economies’ productive capacity, and possibly result in financial crises.

Question: How can policy makers in the region navigate these risks and steer their economies toward recovery?]

Yasuyuki Sawada: Policy priorities must center on protecting lives and communities, ensuring the safe return to normal activity, and supporting the most vulnerable.

Aggressive testing, tracing, and treatment and isolation alongside sustainable social distancing are essential to contain outbreaks.

Without these, generalized lockdowns only flatten the curve at great economic cost and are not sustainable.

Asian governments have taken many measures to combat the pandemic. As of end-August, policy packages amounted to $3.6 trillion, equivalent to about 15% of regional GDP, mainly income support. Central banks in the region and globally have also eased monetary policy and provided liquidity. But financing conditions remain tight for many, such as small and medium-sized enterprises.