A lot has changed since the first cases of COVID-19 were reported in Wuhan, China, in December last year. While much remains unknown about the new coronavirus, COVID-19 has since spread rapidly from its origin in China to every corner of the world except Antarctica. Unlike previous health crises such as SARS (severe acute respiratory syndrome) in 2003 and Ebola in 2014, this global pandemic has caused unprecedented worldwide economic fallout as countries took drastic measures to curb the spread of the virus.

Around the world, factories and businesses are shuttered, and tens of millions of workers find themselves jobless overnight as economic activity ground to a halt the world over. In our globalized era, this is an unprecedented level of disruption to modern society on a scale we have never experienced in our lifetime. Kristalina Georgieva, the managing director of the International Monetary Fund, said that the economic fallout from COVID-19 is unprecedented — the world is facing the worst economic crisis since the Great Depression, with the UN estimating that global economic losses could reach up to $2 trillion dollars.

Confident Facade

Meanwhile, China, just recently the epicenter of the pandemic now overtaken by the United States, has shown signs of turning the corner. The number of infections has stabilized at just under 84,000, and the number of daily new cases has declined sharply. In an apparent sign of the country’s success in containing the virus, the city of Wuhan had its lockdown lifted on April 8, with its residents now are allowed to travel to other parts of the country.

However, movement around China remains heavily regulated and travel is contingent on the color-coded designation on a special government app. The app displays three codes based on the health status and travel history of the user. Those with a green code are allowed to travel freely, and those with yellow and red codes must self-isolated as they are deemed to be at risk of having been exposed to the virus.

While other countries are actively containing the pathogen, China is fighting a battle of its own as it tries to recover from the economic and social devastation of the pandemic. The South China Morning Post recently published a heartwarming video showing emotional family reunions following months of quarantine and isolation. This scene is repeated countless times across the country as tough lockdown measures are being eased.

However, despite having broken the back of local transmission — most of the recent cases to have been imported through foreign travel — the country is still far from being out of the woods. Beneath the confident facade of the state media is a nation deeply anxious that any recovery from the crisis will be temporary and a new wave of infections may be on the horizon.

In a sign of how challenging the recovery journey will be for China, it was forced to reimpose new lockdowns in the north after new cases have been reported. While the worst of the storm may be over, the occasional outbreaks of the virus have dashed hopes of a quick economic reopening for the year.

Tested to the Limit

With an effective vaccine at least 18 months away under the most optimistic forecast, the threat of a second wave continues to loom large and has deterred the Chinese from going out for fear of contracting the virus. This feeling of uncertainty continues to exert a break on business and personal spending, and China’s economy is projected to grow by only 2% in 2020 — its slowest increase since 1979.

In a country where the legitimacy of the government is dependent on its ability to improve the livelihoods of its people, the severe economic slowdown, if it is not handled properly, could have serious political repercussions for the ruling party. The Chinese government has feared social unrest for years and has spent more money on internal security than on defense. Hence, a prolonged economic lockdown with no end in sight is not sustainable, and a clear exit strategy is needed even as the world waits for a vaccine to be developed.

According to the head of the Shanghai team of medical experts, Dr. Zhang Wenhong, China needs to gradually reopen its economy in order to allow the people some respite. However, the reopening must be followed by tough social distancing and other measures put in place to curb the spread of the virus. It must also ensure its health-care system remains effective at picking up and treating any new cases to prevent a (potentially massive) second outbreak. The real challenge is to resume economic growth while preventing a rebound in infections. This is set to test China’s disease control capabilities to the limit.

As factories and businesses gradually reopen across China, allowing the country to overcome the initial supply shocks caused by the lockdown, the demand shock is expected to persist due to a domestic market weakened by massive job losses and psychological trauma endured by the population. To add to its economic difficulties, for a country that has traditionally relied on exports to power its growth, overseas demand for Chinese goods will remain weak as China’s major trading partners continue to be embroiled in outbreaks of their own.

All these factors make a U-shaped economic recovery to be the most likely situation for China rather than a V-shaped recovery. In this scenario, factories and offices would be reopened under stringent social distancing measures, which will in turn limit the productivity of the workforce as there are added compliance costs to be borne by the businesses. Restriction on travel around the country will be relaxed but not fully eased as the Chinese government is expected to continue controlling the movement of its people through digital technology.

The ban on foreigners from entering the country and overseas travel restrictions faced by Chinese citizens are expected to continue for the foreseeable future, which in turn will continue to choke the tourism and aviation industries. As consumer demand remains low, keeping customers away from shopping malls and restaurants, the recovery of the services industry will be slow.

While the Chinese government has unleashed fiscal stimulus to keep the economy going, including billions in shopping vouchers to encourage buying, it is certainly not going to be on the scale of 2008 when it unleashed a record $563 billion stimulus package in the wake of the global financial crisis. The 2008 fiscal bonza has created a mountain of debt that China has struggled to clear. China’s domestic debt stands at 310% of its GDP, the highest in the developing world. Hence Beijing is expected to pursue a “half-way” stimulus package to stimulate consumption and boost liquidity without flooding the economy with too much fresh credit.

With the economy expected to remain in a low-activity mode, the government will likely do just enough to keep the economy humming to ensure social stability, ready to pick up steam again when the time is right. However, full economic recovery seems unlikely any time soon. There are too many uncertainties. One thing is for sure: The present situation in China — much as elsewhere around the world — is likely to improve, but only to a certain extent. Only the development of a vaccine and successful containment of the virus worldwide can do the job.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.