Goldman Sachs says Western powers can learn 5 key economic lessons from China's handling of coronavirus
- Confirmed coronavirus cases peaked in China around the second week of February, two months before the US and Europe.
- Taking China's experience as a case study, analysts at Goldman Sachs gained some insights that are valuable for a glimpse into economic after-effects once measures are lifted.
- The stock of lessons focus on specific areas related to virus control, economic impact, recovery process, inflation and policy.
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In a note Wednesday, Goldman Sachs analysts outlined lessons learned from China's coronavirus-related experience with a focus on five specific areas: virus control, economic impact, recovery process, inflation and policy.
In some of these areas, the analysts also highlighted China's unique position due to its institutional setup, cultural norms and particular practices to emphasize that not all lessons can apply to other countries.
Here are some of the lessons they highlighted:
1. A sudden economic stop with services most hard-hit
Since shutdowns were implemented late January, it can be assumed that the first month of 2020 was less affected than February when there was a peak decline of 30-50% year-on-year, Goldman said.
Service industries engaged in travel, gathering and face-to-face interaction were the hardest hit.
Restaurant services fell over 80% in February, as per analyst estimates. Among retail sales, jewelry, auto, furniture and clothes saw large declines in February while sales of food, beverage and medicine were more resilient.
Activity controls in China started around the Lunar New Year, when economic activities are still seasonally weak. This implies that despite dramatic declines in activity, the hit to full-year real gross domestic product growth should be less than one-twelfth of the February decline. This, analysts said, is not the case for other countries.
2. Shopping's move online accelerated
China's trend of moving from brick and mortar malls to online shops was already underway before the Covid-19 outbreak. In all likeliness, social distancing measures accelerated the trend, Goldman said.
Online retail sales increased 11% year-on-year in March, in stark comparison to the 13% decline for offline sales, the note said.
3. Poorer households were hit hardest
The negative consequences of the virus outbreak fell disproportionately on the lower-income population in China, since the hardest-hit service industries tend to have lower-wage jobs.
For the high-income households, activity control measures did not impact income levels much. This raised savings and led to higher purchasing power, Goldman said.
This disparity was also seen between big companies and smaller ones, the note pointed out.
Cash flow pressures have been more intense on small and highly leveraged companies — which use borrowed money to help finance their assets — during the coronavirus crisis.
Large enterprises that are not constrained by liquidity, in comparison, should be in better positions.
4. A post-lockdown release of pent-up demand
Analysts noted signs of "pent-up demand" in early April in China. During the traditional Qingming festival, a well-known local tourist site opened for free and attracted thousands of visitors. Other instances of consumers seen waiting in line outside restaurants were observed.
The economic downturn, analysts said, suggests that similar pent-up demand is unlikely to be widespread and sustainable, but there is a possibility that it will occur in select industries once shutdown policies are lifted.
China's government was pushing hard for work resumption in March, analysts said, especially in the industrial sector.
Local governments helped restart companies in the same sector to avoid a situation where reopened factories don't have sufficient input from supplies, or insufficient orders from customers.
The lesson that it is easier to turn factories back on quicker in comparison to service-related businesses engaged in travel and consumptions perhaps applies to other countries, Goldman said.
5. Liquidity first, demand stimulus second
In the first two months of the crisis, Chinese policymakers focused on provision of liquidity and bridge loans to households and businesses. Specific measures included tax and fee reductions, subsidies to keep employment, postponing existing loans, and the extension of new loans.
Analysts said these moves likely reflect a view that demand stimulus does not work when activity controls are still in place, since policymakers need to back-stop potential second-round effects from mass unemployment and business bankruptcies.