Frederic Neumann, Co-Head of Asian Economics Research, HSBC
Why investment needs to carry growth
It is early days. Lockdowns may be easing in some places. But the battle against the epidemic has hardly been won.
Still, the contours of the future, one when COVID-19 will no longer dominate our lives, are becoming faintly visible, especially in Asia. Growth may struggle for a while to return to its former vibrancy; such are the lasting economic scars that pandemics inflict.
Beneath the surface, too, growth drivers are likely to shift. Trade may be hampered by a desire, among politicians and managers alike, to shorten supply chains. Bringing the production of critical components closer to home – ‘onshoring’, in business parlance – may seem like a good way to reduce the reliance on production hubs in Asia as well as lowering vulnerability to unforeseen disruptions. Even if the coronavirus hasn’t spared any corner of the world, the instinct, surely, will be to ‘secure’ supply by producing more domestically.
Consumption, however, may face even stiffer headwinds in months, possibly years, to come. Jobs that have been lost are unlikely to return as swiftly: it takes years to expand employment in an economy, and only weeks or months to lose it. In the United States, for instance, more jobs have been lost since the middle of March than have been created since the global financial crisis. Even if the unemployment rate unexpectedly dropped in May, it remains near record highs. In Asia, reliable employment data is harder to come by, but the impact will still be severe: over 60 per cent of workers in India are employed in the informal sector, with few protections or ready recourse to income support. Among the few iron laws of economics is this: employment lost cannot be regained with equal speed.
That means households will be deprived of purchasing power for some time to come. But there’s more. The build-up in consumer debt in recent years, in Asia and elsewhere, supercharging spending before COVID-19, will leave many buyers financially exhausted. Even in China, once counted among the thriftiest nations, household debt has climbed sharply in recent years, exceeding that in Germany in 2019. The average Chinese consumer now holds triple the amount of debt relative to income compared to when the global financial crisis struck.
In China, even those who’ve avoided splurging on debt may restrain their spending further. The current crisis, after all, serves to highlight how quickly jobs may be lost and how rapidly health care expenses can climb. Saving rates, therefore, are bound to rise in China and elsewhere, as household spending on things deemed non-essential, from restaurant meals to travel, continues to decline. After such a jarring disruption to everyone’s life, a larger nest egg will let many sleep easier.
With trade languishing, and consumers more withdrawn, what’s left to drive growth?
Investment. This comes in two forms: public and private. Policy can directly influence the former, as it is a function of political and administrative decisions rather than market forces. We should seize the opportunity. Public investment, in East and West, has for years fallen short of what’s needed to sustain growth and prosperity. Even China, long more focused on infrastructure than others, has barely been able to keep pace with rapidly growing demand.
The most obvious part is ‘soft’ infrastructure, such as healthcare. Investment is sorely needed in hospitals, clinics, and nursing homes. COVID-19 has exposed a glaring need in most economies, and rapidly ageing populations in East Asia – and Europe and North America, too – will only raise demand for medical care even in more normal times. This, then, is a good opportunity to build the necessary infrastructure and, in the process, raise preparedness for the next virus that will inevitably sweep the planet one day.
However, the ‘soft’ part goes much further. Education is becoming ever more important. If humankind wants to sustain the advances of recent centuries, or simply ensure continued productivity growth, ever higher levels of education are needed – not simply for the gifted and scientifically talented among us, but for everyone. Talent, insight and knowledge will, more and more, be what sustains prosperity, and for this we won’t just need education, but inclusion. Especially in a post-COVID world, societies cannot afford to leave resources idling by the wayside. Major investments are needed to allow society’s most vulnerable members to unleash their talents.
Public investment of the ‘harder’ kind, composed of cement and steel and wires, will need to increase as well. Economic advances in recent years have in most countries outpaced the expansion of physical infrastructure, from roads to bridges, water treatment facilities to subways, and much else besides. In this sense, much of the world, notably the West, but many parts of Asia as well, have been living on borrowed time. This will be an opportunity to put us, finally, on a more sustainable path.
And that involves, foremost, environmental sustainability. Climate change may, in a few, short years, cause far more casualties than COVID-19. Water scarcity, poor air quality, and resource depletion, just to name a few, pose bigger challenges than the coronavirus to sustained prosperity and the well-being of mankind.
All of this, sceptics will argue, points to an expansion of public spending we cannot afford. But, likewise, we cannot afford not to act. And since we need investment, well, we may as well make it count.
This is an edited version of an article that first appeared in South China Morning Post on 16 June 2020.
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