- On 16 July China reported positive growth in the second quarter, after the contraction earlier in the year.
- It was the first major economy to regain ground, a sign that activity can return once the epidemic is under control.
- Crises do not arrive or leave everywhere at the same time: it pays to analyse each market separately.
On 16 July 2020 China reported positive growth in the second quarter, after the contraction earlier in the year. It was the first major economy to regain ground, and the news was followed closely around the world: if activity could return after so intense a halt, the road to recovery in other areas looked less uncertain. But a single quarter is not enough to draw definitive conclusions.
However, a positive figure is not the same as a complete recovery, nor a recipe that applies to every country. China had been the first to suffer the epidemic and also the first to bring it under control, on a timetable of its own that other economies did not share. For European business owners and families, the news was a sign of hope, but also a reminder that each economy follows its own pace.
What growing after a fall means
An economy enters recession when its output falls over several quarters, and exits when it grows again. China was the first major economy to do so: after the contraction early in the year, it recorded positive growth in the second quarter. It was a sign that activity could recover once the epidemic was under control. It was a sign that activity could recover once the epidemic was under control. Technically leaving a recession is not the same as having regained everything lost.
The meaning of that growth needs some nuance. After a sharp fall, a positive quarter may reflect above all the return of activity that had been halted, rather than a solid expansion. The difference matters: regaining the previous level is one thing, growing beyond it another. That is why analysts usually look at several quarters in a row before speaking of a consolidated recovery.
An effect on the rest of the world
China’s recovery lifted commodities and some European exports. When a large economy starts buying metals, energy or capital goods again, the countries that produce or export them benefit. For some European companies, China went from being a supply problem to being a recovering market. That transformation affected purchasing, production and investment decisions.
That change of role is relevant for anyone trading with Asia. Companies that had seen their supply chains interrupted early in the year could now consider restarting orders, and those that exported to China saw a source of demand reopen. But each sector reacted differently, and not every business benefited equally from the improvement, so the analysis had to be done case by case. A general indicator does not replace observing one’s own orders.
Each economy on its own timetable
But it was also a reminder that crises do not arrive or leave everywhere at the same time. A country’s recovery does not mean others are recovering, and companies with business in several regions need to analyse each market separately. A good map of where one buys and where one sells allows decisions to be adjusted more precisely. Knowing the exposure to each region reduces dependence on a single source of demand or supply.
That map should include, for each market, the health and economic situation, its weight in the company’s sales and purchases, currency risks and payment terms. Reviewing it regularly helps to discover opportunities and to detect weak points in time. And when the information available is scarce, it is reasonable to be prudent and avoid commitments that are hard to reverse. A half-yearly review of this portfolio of markets, with the adviser, is usually enough.
Seeing the world as a set of economies on different timetables helps to decide better.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
