Again, that is far from being the case today. COVID-19 hit at a time of much greater economic vulnerability. Significantly, the shock is concentrated on the world’s most important growth engine. The International Monetary Fund puts China’s share of global output at 19.7% this year, more than double its 8.5% share in 2003, during the SARS outbreak. Moreover, with China having accounted for fully 37% of the cumulative growth in world GDP since 2008 and no other economy stepping up to fill the void, the risk of outright global recession in the first half of 2020 seems like a distinct possibility.
Yes, this, too, will pass. While vaccine production will take time – 6-12 months at the very least, the experts say – the combination of warmer weather in the northern hemisphere and unprecedented containment measures could mean that the infection rate peaks at some point in the next few months. But the economic response will undoubtedly lag the virus infection curve, as a premature relaxation of quarantines and travel restrictions could spur a new and more widespread wave of COVID-19. That implies, at a minimum, a two-quarter growth shortfall for China, double the duration of the shortfall during SARS, suggesting that China could miss its 6% annual growth target for 2020 by as much as one percentage point. China’s recent stimulus measures, aimed largely at the post-quarantine rebound, will not offset the draconian restrictions currently in place.
This matters little to the optimistic consensus of investors. After all, by definition shocks are merely temporary disruptions of an underlying trend. While it is tempting to dismiss this shock for that very reason, the key is to heed the implications of the underlying trend. The world economy was weak, and getting weaker, when COVID-19 struck. The V-shaped recovery trajectory of a SARS-like episode will thus be much tougher to replicate – especially with monetary and fiscal authorities in the US, Japan, and Europe having such little ammunition at their disposal. That, of course, was the big risk all along. In these days of dip-buying froth, China’s sneeze may prove to be especially vexing for long-complacent financial markets.
Stephen S. Roach, former chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of "Unbalanced: The Codependency of America and China."