Against the backdrop of escalating global COVID-19 pandemic & early signs of financial market contagion, we revise down our 2020 China real GDP growth forecast to 2.6% YoY from 6.1% YoY. We now see higher probability of severe global recession, and therefore adopt our previous “bear-case scenario”¹ as the central case (~6ppt dent from the pandemic on 2020 GDP). With smaller projected fiscal revenue & higher expenses, much of the planned deficit expansion will now be deemed “cyclical” & generate less positive “fiscal impulse”², We see China GDP growth rebounding to 9.0% YoY in 2021, driven by a low base & stabilized sequential growth.

►Sector wise, we expect export growth³ to contract by ~18% YoY in 2020 & be the main drag on growth in 2-4Q2020. Nominal import growth may take a larger hit of ~25% YoY contraction in 2020. Overall consumption may still grow below trend in 2Q20. Private inv’t may be muted before nominal growth improves more visibly in 3Q2020, property inv’t growth may recover after mid-2020. Therefore, gov’t & SOE-led investment may bear the brunt of the counter-cyclical efforts.

►In regards to the cyclical path, the recovery in external demand may start in 3Q20, & pick up pace visibly in 4Q20. We see a “global lockdown” (i.e. T=0) partially resembling that of China in Jan-Feb for most of 2Q20. Based on China’s trajectory but augmented the “path” w/ more realistic assumptions of epidemic control execution, COVID-19 may reach “plateau stage” overseas in 2-3 months. After a gradual ramp up, we expect more forceful global restocking by 4Q20.

With real GDP growth below trend in most of 2020, we expect nominal growth to slow meaningfully to 2.8% YoY in 2020, before rebounding to 11.1% YoY in 2021. Industrial products may experience severe deflation, but prices of staples & healthcare products will be better supported – we keep 2020 CPI forecast at 3.3% & cut 2020 PPI forecast to -3.7% from 1.2%.

We now expect greater cyclical mgmt. efforts on both fiscal & monetary fronts, & a stronger RMB at 6.72 vs. the dollar by end-2020. With a now larger “cyclical” fiscal deficit expansion of est. ~4-5% of GDP, overall broadly defined fiscal deficit may expand by 6-7ppt of GDP in 2020 vs. 2019. The expansion will likely be financed by higher gov’t & quasi-gov’t borrowing. We expect another 40bp of LPR cut, 150bp more in RRR cuts, & 25bp of benchmark deposit rate cut in the remainder of 2020. As the “USD liquidity crunch” subsides in 2H20, CNY may rise vs. the dollar & the basket, due to widened growth & interest rate differentials b/w China & rest of the world.

Both the upside & downside of our forecast rest on 2 factors: 1) effectiveness of the efforts in stemming the pandemic & preventing further financial market contagion; 2) the scale of China’s counter-cyclical efforts.

The COVID-19 outbreak overseas is still some time away from the “moderation stage”

The global COVID-19 pandemic may be wider-spread, more severe, and longer-lasting than previously projected. As of March 21, cumulative overseas confirmed cases of COVID-19 have surpassed the 200,000 mark, with consecutive days of DoD addition of ~30,000. More worrisome is the fact that daily new confirmed cases are still growing at ~20% DoD, showing no definitive signs of slowdown, even in terms of the “third derivative” (Figure 1&2). In addition, the pandemic has escalated in multiple major economic blocks, including Europe, the US, the Middle East, and Asia. Meanwhile, countries where the outbreak used to appear more benign are suffering a serious influx of imported cases and the consequent local infections (Figure 3).

►COVID-19 outbreak in Europe continues to escalate, seriously affecting all major economies. As of March 21, cumulative confirmed cases have reached 142,443 in the Schengen Countries and 5,068 in the UK. Even with an already-large base of 53,578 cases and 14 days since the nation-wide “lock-down” commenced, daily new addition of confirmed cases are still growing at 16% DoD in Italy, indicating that the epidemic control may have been less than effective. Moreover, cases in the larger EU countries like Spain (25,496 confirmed cases), Germany (22,426), France (14,459) are rapidly ramping up. Daily growth of new additional cases are still averaging at 11% DoD in the past 3 days, while cumulative cases in EU double every 4-5 days (Figure 3). Meanwhile, it appears that the English Channel fails to stem the virus, with cases in the UK reaching (5,068) and doubling every 2-3 days.

►The situation in the US has deteriorated swiftly, with daily new cases reaching ~7,000/day. Despite a later start with COVID-19 testing, confirmed cases in the US have quickly ramped up to 26,664 from 1,328 in 10 days. Moreover, with nation-wide testing speeding up the conversion of suspect cases into confirmed ones, the US has added 12,332 cases in the past 2 days. With daily new cases still mushrooming at the rate of 30%-40% DoD and cumulative cases tripling every 3 days, US has taken over most of the EU countries, and is set to approach Italy in total cumulative cases in the next 1-2 weeks (figure 3).

►The Asian block, esp. the ASEAN countries, are witnessing a resurgence of new cases as expats flock back from EU/US. In Asia, especially the South East Asian Block where the epidemic was relatively benign in the first round of the outbreak, we are witnessing a re-acceleration of daily new cases in the past week as expats return from EU/US. More specifically, new cases in Singapore, Malaysia, Hong Kong have all picked up visibly in the past week. Meanwhile, a few other countries that were geographically more removed from the epidemic previously are seeing rapid increase of new cases as well, including Canada and Australia.

Even assuming effective quarantine and precaution measures being taken globally, the pandemic may continue escalating in the near future, as most of the affected countries are still in the early stage of epidemic control (Figure 4). Since the more serious epidemic control measures (i.e. quarantine and precautions) have only been taken since early-mid March (i.e. T=0), most of the countries are still in the “escalation stage” or “early control stage” of the epidemic. Figure 4 shows that most of the affected countries are still at least 1.5 months behind China on the “curve”, where countries like the US and UK may be 2-3 months behind. Considering the fact that even China’s economy is still not operating at full production capacity at T=59, it may be a while before we can start to plan production resumption in the rest of the world.

Figure 1: Global daily new cases is now 7-8X that of China at its early-Feb peakSource: WHO, ECDC, WIND info, CICC Research

Figure 2: Daily new addition of confirmed cases overseas has been growing at ~20%, yet to show signs of slowdownSource: WHO, ECDC, WIND info, CICC Research

Figure 3: The most affected overseas countries at a glance – escalation all aroundSource: WHO, ECDC, WIND info, CICC Research

Figure 4: Where is everyone in their battle against COVID-19?Source: WHO, ECDC, WIND info, CICC Research

For more details, please see our report Cutting growth forecast amidst escalating global COVID-19 pandemic published in March 2020

[1]See China Macro Thematic Report, Estimating the impact of COVID-19 on growth in China, published on March 13, 2020.

[2]See China Macro Brief, Quantifying the Loosening Impulse post COVID-19, published on March 15, 2020.

[3]nominal, in USD terms