Asia's Economy to Shrink for the First Time 'in Living Memory'

“Living memory” is a very long time. Perhaps 90 years, based on the age of a small number of extremely old people around the world. That is how long it has been since Asia started growing economically. And that period has come to an end, according to the International Monetary Fund. The combined gross domestic product across the region will drop by 1.9% this year. That is a revision down from an earlier forecast of zero growth.

The two reasons given are that COVID-19 is not contained in some of the region’s nations. The other is that the economy outside Asia is so poor that it will sap demand. The IMF expects a 6.6% improvement next year, if the COVID-19 spread does not become much worse. Since the spread is rising quickly, the 6.6% number is already in danger.

Total trade is expected to drop by 20% this year in Japan, the Philippines and India. China’s economy has started to recover, the group said. The battered global economy is a headwind. If COVID-19’s spread worsens, even China will not be spared. Its exports are too large a part of its GDP.

At least one stopgap solution, the IMF says, is for nations to provide economic assistance to their populations and to do so now. That means, in many cases, the need to take on more sovereign debt. While the idea seems prudent short term, it will burden their balance sheets as they move forward. In a related suggestion, financial add must be given to a large number of those nations, and perhaps for several months. That, in turn, runs into the sovereign debt growth problem again.

If nations cannot bail themselves out completely, the IMF stands at the ready to help:

Given the large and looming uncertainties at this moment, countries with sound fundamentals may want also to consider use of the Fund’s precautionary credit lines such as the Flexible Credit Line and the Short-Term Liquidity Line to insure against an abrupt tightening in external liquidity.

That raises the sovereign debt problem again.

The solution to the crisis is to damage national balance sheets. However, that may be all that is left to stave off catastrophe.