As the source of the outbreak, China is going through stages of the coronavirus crisis before other countries. And although it’s showing signs of recovery, it’s unlikely to offer CFOs trying to model their business’s trajectory much more than a broad indicator of what’s ahead, Andrew Duguay, chief economist at business intelligence company Prevedere, says.
"We can use China as a leading indicator, perhaps directionally," says Duguay, who has been releasing outlook updates to help business leaders stay on top of the pandemic from a strategic standpoint. "If it comes out of the crisis with improved but not great numbers, the United States and Germany and others will probably follow that pattern."
There are three caveats to predicting the course of the crisis in the U.S. based on China's experience, he says.
The first is data quality. It’s hard to gauge the reliability of the public and private data that comes out of the country because of restrictions the government imposes. "There’s no silver bullet indicator to compare to our own economic conditions as we look to the second half of the year," he says.
The second is China’s status as a still-emerging economy, which means it will experience growth levels upon recovery that the U.S. and other mature economies won't see. A good example is online retail sales. Prior to the crisis, the country was seeing year-over-year growth of 15-20%, and as it recovers in the months ahead, it's possible it will see that growth shrink to about 3%. In the U.S., by contrast, online sales are likely to show no growth at all.
"Three percent is a drastic decline by Chinese standards, but by U.S. standards, we should be expecting actual contraction," he says. "So, when we look for China’s economic recovery, there might be some false positive signals, just because of the economic momentum an emerging market has."
The third caveat is the role the government plays in the economy, for which there are no American or European parallels.
"The state-owned industries can really control employment, wages, and debt levels in ways the private sector cannot," he says. "When you look at China, you’re going to see, industry by industry, there won't be a natural market reaction to the industrial downturn like you might see in the U.S. or Europe, where there's a faster supply-demand response, because you’re dealing with more private-sector, market-based fundamentals."
Different health impact
Even China's experience with the crisis as a health emergency, rather than an economic emergency, offers only limited guidance.
At the height of the outbreak, the country saw 53 cases per one million people, far fewer than in the countries that followed, including the U.S., which has seen 943 cases per million. Other countries, each acting at different speeds and with different rigor in shelter-in-place mandates, have different numbers, making it hard to use China or any other country as a leading indicator, except in the broadest measure.
Duguay says there are some indicators the health community is watching that suggest the U.S. might have reached its peak infection point on April 5, because that day saw a drop in the number of new cases.
Whether or not that turns out to be the case, at some point that moment will be reached and restrictions will begin to lift. Economically, the U.S. has some advantages that other countries don’t. For one, it's less exposed to the ups and downs of global trade than other countries.
More than half of the Russian economy, for example, with its reliance on oil, is highly exposed to shifts in global trade, and, as a result, has seen its currency value plummet 20% in just three months, while the U.S., which provides the world’s reserve currency, has seen the value of the dollar rise by more than 9% in that same period.
Even so, there’s little reason to believe the economies of the U.S. or any other country will return to anything close to what it was before the crisis hit.
"We don’t see high likelihood these numbers will get back up to pre-recession levels, multiple quarters out to the future," says Duguay. "Global growth is going to be suppressed through the second half of the year."
The most likely scenario is a recovery in which numbers across the board improve but stay down, constituting a new normal, at least until 2021.
"As the U.S. moves through its health crisis, and our shelter-in-place policies eventually get lifted, maybe next month, there are people who will be able to go back to work, and we’ll start to see economic indicators move up out of crisis mode," he says.
But they won't be shooting up to what the country saw before. "Are things really going to get back to normal, or are things going to look better than the crisis but nowhere near pre-crisis levels? That's probably what we’re going to be exposed to."