China’s Uneven Reopening Shows Fear Might Hold Back Economies

other city in China. Hello, and welcome to Stephanomics, the podcast that brings the global economy to you, which this week includes the inside of Sharon Chen's apartment in Beijing. She's the Beijing bureau chief of Bloomberg and she's in quarantine because she's just returned from a reporting trip to Whuhan. I wanted to talk to her because we're focusing this week on what the path out of lockdown might look

like for all of our economies. Our chief economists for Europe in the Middle East, Jamie, has been looking at how quickly the economy could come back depending on which measures are removed and when are we talking to him in a minute, and also playing you part of a conversation I had with the former president of the European Central Bank, Jean Clautriche. But first let's hear more about that trip to the city of Wuhan, first into the

crisis and now first out. Yes, so we went to Wuhan on April four, just before the quarantine was lifted on April eight. The idea was to go there and see, you know, how does the city of more than ten million people emerged from lockdown and it's the first city in the world that went through it. And throughout this whole process, this virus outbreak, Wuhan has kind of been

ahead of the curve. Did have been the first city to deal with it and then now the first city to be locked down and then the first city to try to get back to normal. And we thought that going there maybe give us some clues about what kinds of things would happen when other big cities try to emerge from lockdown. Yeah, so that was the idea behind the trip. And now that I'm back in Beijing, I've been quarantined in my apartment for fourteen days and I

can't leave on on Wohan. What what struck you most immediately about the experience there, because, as you say, we do look to Wuhan as an extreme example of the impact of the virus, but also a place that was quite far ahead of everywhere else. Yeah, I mean, I think my biggest takeaway is that it was really kind of a two speed recovery or like coming back to normal. So you had the resumption of work and that was really apparent and really immediate, especially because it was something

that the government was pushing. So the day we arrived there were there was hardly any traffic, and by the time we were leaving ten days later, we were getting stuck in traffic constantly at rush hour because people were going to work. You know, factories were working at full production capacity. They were working through the weekends, they worked through the long holiday that we were there to make

up for all the lost time. But in terms of consumption, you know, the shopping malls were open, the restaurants were open, but they were basically empty. No one was eating out. Even the few people that we spoke to in the mall said that they don't think that they would go out like they used to before just for fun um, you know, they would really only go out for essential activities. People were still scared. I think both of the virus, even though there are officially no cases in Mohan. Now, um,

they're they're both scared of the virus. It's kind of I think a psychological hangover after being told for weeks and weeks that it's very dangerous outside and you can't

go outside and it's dangerous interact with people. But they were also scared of being quarantined again because in Mohan they have this health code system, so you're either green, yellow, or red, and even going into a shopping mall where later someone else is either suspected or confirmed of having the virus will turn your coat yellow and then you can get quarantined again, and your housing compound can refuse

to let you leave the housing compound. So there's kind of like this high level of paranoia about both those things, both the virus and about being locked up again. So I mean, I think consumer habits and just social habits really have changed, and there was kind of this divergence

between going to work and going out for fun. Now that's fascinating and I think and we are seeing that when we're looking at the sort of high frequency economists are now looking at the high frequency data in Beijing and other cities and you can see this reel, there's a sort of bat as you say, there's the kind

of supply side and the demand side. The supply side shock as we used to talk about it has gone because people are more or less back to work, But anything that's to do with spending and consumer activity, particularly at the weekends, is just still way below where it was. And that's obviously concerning for economists thinking about how steep

the recovery is. When you look at Wuhan and then you read people still talking about that v shaped recovery that we turn everything back on again, do you think that is is quite far off the map. Yeah, I mean I think if you listen to you know, like US President Donald Trump saying when we lift the lockdowns, everything's going to go back to normal, it just seems

so far removed from what's happening in Buhan. You know, just because people have the freedom to go outside doesn't mean that they want to the idea of people sitting in a crowded restaurant or going to watch a movie in a theater or going to a concert. I mean, like, I don't think anyone in Wuhan would even consider that

within the realm of possibility. Being at home for so long, I think it's really changed people in the long term, Like people are just more used to eating at home, used to cooking at home, not really going out getting food delivered. We also interviewed a restaurant owner. He off

his ten restaurants. None of them have reopened. The original plan was for him to reopen three, and then when he realized that nobody's going out anyway, he decided he was just going to reopen one, and eventually he reopened none of them. And he said, you know, people now they don't go out for lunch on their lunch hour. Everyone's bringing lunch to the office, like bringing home cooked food.

So all these little things that are really going to impact businesses like his, especially small businesses, I think, and I think it gives that point of the permanence of some of these costs. We know, as you said, the manufacturers are quickly doing the orders that got put on hold, and you could imagine that they might get back eight or ninety percent of what they would have had. You know, they'll grow much faster now in the classic kind of recovery way and catch up that lost ground. But in

the service sector and spending on things like restaurants. We just we know that we're not going to be eating twice as many restaurant meals in the second half of the year. But what you're telling me is that we may not even be eating half the level of our normal level. That could really have an impact on the pace of the recovery. Well, Sharon, so how long have you got before that bell goes off your front door? How when do you when do you get to see

the sun, to feel the sunshine again? So I have seven days to go, but Beijing has just said that my district is a high risk area because they discovered a cluster. A student from the US came back and tested positive for the virus two days after he completed his fourteen day quarantine. So there's been some rumors that they could extend it to twenty one days, but so far that hasn't happened. So fingers crossed that I get up in a week. Good luck, fingers crossed, and thanks

so much for all the reporting you're doing. Thank you. I We'll be hearing more from Sharon and others in China in the weeks and months ahead as we start to see and feel what life looks like after lockdown. But now we have some new numbers to feed into that conversation brought to us by our chief Amire economist, Jamie Rush. Firstly, I should thank you for all that

you're doing with the Europe team and globally. But something you did last week I thought was particularly interesting trying to take a stab at thinking about the economic impact of different stages of lockdown. And I guess what's the relevance of that to anybody thinking about where we go from here? As we know now that it's not going to be like flicking a switch when we start to move out of lockdown, we'll probably go through several stages.

What did you do to try and get a handle on what that might mean for the economy and what were the results? So the starting point for our analysis was to look at what's been going on in France. In that country, the Statistics Office has published quite a lots of information about how lockdowns are affecting the economy, and what they've found is that the lockdown period has

coincided with a falling output around about a third. But we've combined that information with some data from the Platonic School of Government, which has gone around and measured the stringency of of measures across countries. So when we look at the output loss, it's about thirty and when we look at the stringency index it's it's that's one data point to the other data point we have is that we know that when stringency is is zero, the output

loss is going to be zero. So the question that we've been asking ourselves is is it reasonable to draw a line from zero to and then just read across what that means for output and to kind of get

a sense of whether that is reasonable. We've looked at other indications, so we know that different stringency measures have been in place across countries, and we've plotted those against the change in the p m I in those countries, so we can see that actually they do look sort of linear, and the same is true when you look at traffic congestion. So the second step in our analysis was to take the Platonic School's methodology, unpack it, and

then create a stringency reading from scratch. So a scenario for moderate containment measures. So we assume, for example that UM school. Some schools are still shut, but many are open. Some businesses are allowed to open, but but many remain shut and so on, and so we think this is

consistent with a phased withdrawal of containment measures. And what we found is that when you move from this full lockdown back to the sort of phasing out of containment measures, the output loss drops from about thirty five to about so that step down is likely to be quite large. And we came into the thinking that it would be a V shaped recovery. We've progressively deepened the V. You know, we've had to increase our estimate of the short term

impact of these shutdowns. You talked about the thirty five percent impact in France of a more or less total shutdown. Have we also changed our view of the shape of the recovery? What do you actually think the recovery is going to look like now? If it's not a V, is it an L? Is it a you? What do

you think? I think what we've learned in the past few weeks is which governments are stepping up to the plate and offering the fiscal support that is required for persistent effects on output to be avoided after the pandemic passes.

And we're also seeing which governments aren't stepping up to the plates, So I think in the in the doing the right thing category, we have have Germany and we have the UK, both of which are offering substantial income support to businesses a lot of liquidity to loan, so the comp these don't go bust. Time will tell whether that has come fast enough to prevent the worst damage

from being done. But our base cases that these are economies that are likely to bounce back relatively quickly, but not all countries are are doing enough, so I think Italy and Spain probably fall into that category. The fiscal support isn't as forthcoming as it is elsewhere, and this means that the damage is going to be the more pronounced, and this damage is going to be hard to reverse. So once companies go bust, it takes time for new

ones to spring up. And what we don't know is what sort of condition the banking sector is going to be in after all this, so they may not even be the loans available for new businesses to start, so

there's um. I think these countries are the ones where the bounce back it's likely to be smaller, and they're also the ones that risk the slowest recoveries in future quarters and the consequences of the economy not bouncing back in the second half a huge If you can run a persistent output gap for many years, that will push debt up by a huge margin, whereas the a short chart shock is likely to have a smaller long run impact. Well,

and you raise it. That's a key point, I mean, and it's a good way of thinking about it that if you're spending a lot of money now, you are directly investing in the gradient of your recovery. You're you're you're investing in a faster bounce back, and that obviously would be a contrast with the recovery we had after the global financial crisis, where we saw that there was a lingering effect and a much slower rate of growth for many years after the crisis. Obviously hoping that that

doesn't happen this time. But your point about Spain and Italy actually in particular has a very high debt stock. There's much more constraints on it in terms of how much it can spend right now. But the implication of what you're saying is if they don't spend now and have that much more costly recession, slower recovery in the long run, that's worse for debt. I think that's absolutely right.

So if they spend more now and debt rises relative to GDP by say ten percentage points, that's not a disaster. That's that's about as good as things can possibly look. Far more costly would be spending too little now, the economy failing to recover, and debt spiraling out of control as the deficit is impossible to bring back down again.

There were some pretty striking figures were used to work the Office for Budget Responsibility, the Britain's fiscal watchdog Ransom what it considered to be sort of illustrative numbers on the public finances for the kind of hit to the economy that you were talking about at the beginning um and had the implication was a pretty big jump in public debt. When you think now, if you had to say, how do you think that's going to be paid for?

Are we going to be looking at a big increase in taxes at the end of this or are we just going to say, Okay, now we've we've had this big crisis and we've just got a higher debt and now we're going to carry on light before So I think once we get the other side of this crisis, debt's going to be a lot higher, and some countries are going to feel pressure to reduce it. And I think, actually,

that's that's relatively that's sensible. Um, if we just allowed debt to rise by temper percentage points every time there's a crisis, then at some point you reach a position of unsustainability and defaults of what follows. So I think it's it is the case that some of these debts are going to have to be repaid. Um. It doesn't have to be repaid fast. Our storia doesn't have to happen before the economy is recovered. But in the long run, yes, it's going to have to be financed by by higher taxes.

And you know, I think that there are ways of there are ways of doing that. I mean, exactly who experiences or feels the burden most is a question for the politicians. But you know, look at Germany's history of paying for reunification. It was done with the tax that was explicit linked to the activity is intended to finance. Um, something like that wouldn't be completely mad. I don't think in the in the future, Jamie, I'm sure we'll have plenty more to talk about in the next few months,

but thanks very much. As it happens, I just chaired an online discussion on some of these issues for something called the Global Solutions Initiative. There were some lofty participants who said lots of interesting things, But let me just play you a few comments from the former President of the European Central Bank, Jean Clautriche on the scary subject

of global government debt. We are cumulating an enormous amount of additional public spendings we had since the former previous crisis, an accumulation of indebtedness at the global level, graphically all countries apart from a very few countries. Germany is a

case in point, but practically the only casing point. So we we have to be absolutely aware of the fact that there would be enormous problems not only to digest what we are spending right now, but also what we had unfortunately spent during the ten years after the previous crisis. And then I have to say I am wearing a lot for the example banks, because of course I eliminate hyperinflation,

which would be a solution to swallow the debt. The enormous amount of that I eliminate the default or generalized default data aviation restructuring that that would also be a dramatic trauma, and I expect that we will avoid that. But then what's left financial repression, hyper taxation, or a combination. And there the sample banks have a very very important

role to play. A combination of very low interest rates for a long, really good time together with a reasonable level of inflation suddenly not the zero inflation or very repreation we had in the past, and they've gone through them that. Thanks for listening to Stephanomics. We'll be back next week with more on how COVID nineteen is turning the global economy upside down. Remember you can always find us on the Bloomberg Terminal, website, app or wherever you

get your podcasts. For more news and analysis from Bloomberg Economics through the week. You can follow as Economics on Twitter, and you can also find me on at my Stephanomics. This episode was produced by Magnus Hendrickson Special thanks to Sharon Chen, Jamie Rush, Jean Clautriche and all at the Global Solutions Initiative. Scott Lamon is the executive producer of Stephanomics and the head of Bloomberg Podcast. Is Francesca Levi the hand, the