Asia Economy

China looks to bounce back from virus, but its recovery will likely be hurt by surging global cases

Key Points
  • Coronavirus infections in China have come down quickly in recent weeks, and the rate of resumption of work at its factories and provinces has also inched up, according to analysts.
  • But analysts say that the pace of recovery will be held back by weakening demand from Europe and the U.S., where cases are still surging.
China's recovery will be held back by weaker demand amid virus outbreak, Moody's Analytics says

Coronavirus infections in China have markedly declined in recent weeks, but the Asian giant's economic recovery may be held back by the global outbreak, as countries around the world struggle to contain the rapidly spreading disease.

China has seen a drastic drop in infections — from hundreds of cases per day in February, to less than 50 each day this week.

The rate of resumption of work at its factories and provinces has also inched up, according to analysts tracking the progress of activities in the country. China had shut down most provinces in a bid to contain the outbreak, and roads, transportation networks as well as factories had been closed.

However, Steve Cochrane, chief Asia Pacific economist at Moody's Analytics, told CNBC that the pace of recovery in China might not be as fast as hoped for — even if infections are slowing.

"It seems that we're beginning to be on the back side of this now here in Asia, given that the number of infections is down. In China, the infections still remain fairly isolated in Hubei province, that's a very good thing," he said, referring to the epicenter of the outbreak in the country. "But I don't see the recovery in China really coming on any more faster than we might have expected."

The virus outbreak has now spread to China's key trading partners, including South Korea, Japan, Europe, and increasingly the U.S.
ANZ Research

He explained that's due to softening demand from the rest of the world, where cases are surging. Italy, Iran and South Korea have reported more than 7,000 cases each, while France, Spain and Germany each reported more than 1,200 cases, according toe the World Health Organization's latest figures. 

In Europe, Italy — which has the highest number of cases outside China — has shut down the entire country. In the U.S., cases crossed 1,000 this week, and the virus is present in at least 35 states.

"Just as China may be able to get production up close to where it was last year, global demand is going to weaken, clearly from the U.S. and Europe. Europe is on the cusp of recession. The U.S. economy is strong but very vulnerable to the coronavirus," Cochrane said.

What does the coronavirus mean for China's economy?

Cochrane said weakening consumer sentiment worldwide would eliminate or reduce demand for goods from Asia, setting back the recovery for China and the rest of Asia.

He also pointed to highly complex supply chains, which have been hit by the lockdown in China, where many global firms have manufacturing facilities. "It's no small feat to get them back working in a very, very efficient way."

In addition, he said there are still difficulties in getting workers to return from their home provinces to work places, due to "regulatory issues such as health checks" that are holding them back. Most workers have been stuck in their home towns since the Lunar New Year holiday, which was extended due to the outbreak. Even if they return to their work places, which may be in a different province or city, they could be subject to a quarantine period.

In a note on Wednesday, ANZ Research estimated that most economic activities in China will likely return to normal by the second week of April.

But it said a resumption of economic activities "does not guarantee a sharp V-shaped economic rebound," referring to economic cycles that see a steep fall before recovering sharply. Given that the pandemic started earlier in China than in other countries, the world's second-largest economy has seen a "severe impact" in the past two months.

"In addition, the virus outbreak has now spread to China's key trading partners, including South Korea, Japan, Europe, and increasingly the US," wrote ANZ Research economists Raymond Yeung and Zhaopeng Xing.

"Global demand will become increasingly uncertain. China will need to brace itself for the challenging growth outlook," they wrote.