The economy is unlikely to go back to pre-virus level of activity without flattening the virus spread curve until vaccines or therapeutics become widely available
Except for remittance all indicators through February 2020 suggested a growth slowdown in Bangladesh. Investments were declining as indicated by falling import of capital machinery, FDI and private credit growth; private consumption was weak as indicated by falling sales of fast moving consumer goods (FMCG) and collection of VAT at the retail level; and exports were declining. The recent 5.2% GDP growth estimated by the BBS for FY20 based on data for the first nine months affirms this hunch. The virus dealt a deadly blow by clamping down on the economy's accelerator. The sudden brake idled the production capacity in all sectors, some more than others.
Economic transmission of the virus
The advent of the coronavirus reduced mobility by adding a virus contraction risk in the movement of goods and crowding or assembly of people in public and private spaces. In jargon, it added a friction to the functioning of markets by increasing transaction costs. The market and public policy response to the virus contraction risk decreased productivity in most activities and its sum known as Total Factor Productivity (TFP). The TFP decline overall is greater than the sum of decline in productivity of individual activities because activity interruptions propagate productivity decline on the supply side through linkage effects—the dispersion of specific sector productivity decline to all sectors.
The disruptions were uneven across different stages of the supply chain—imports, domestic production, transport, and trade. A chain is as good as its weakest link, which surely were transportation and trade. TFP losses are exacerbated by forces such as reverse migration through which labor moved from high to low productivity sectors.
Income losses, new health hazards in shopping and new uncertainties about future health of the economy depressed animal spirits leading to cuts and postponement of consumption and investment plans of households and firms. The initial shock to expenditures is propagated through multiplier effects. One person's expenditure is another person's income. As consumers stopped shopping, eating out, getting haircuts, riding uber and rickshaws, incomes of the providers of services in these activities fell which in turn reduced their expenditures and so on.
Both aggregate supply and aggregate demand contracted resulting in jobs and income losses for 70% of urban and 60% of rural residents across various income classes and occupations, according to various surveys. BIGD-PPRC studies estimated per capita income per day in urban areas was Tk108 before corona and Tk66 in June. In rural areas, it was Tk96 and Tk53, respectively. Median wages declined 41.7% in Dhaka and 33.3% in Chattagram in April-May, according to other surveys. Poverty is estimated to have doubled from 20% to 40%.
Recent data are beginning to show the impact of the disruptions caused by the virus on manufacturing, the growth leader on the supply side in recent memory. The general index of large-scale manufacturing production declined by 28.7% in April relative to March. Production of woven garments, knitwear, fertiliser, cement, and iron & steel were significantly lower than in March as well as April last year. Virus mitigation behavior increased demand for soaps and detergents as well as pharmaceutical products. Production in the pharmaceutical sector was 33.5% higher relative to last April 2019 and 1.8% higher relative to March 2020. Production of soaps and detergents was 17.1% higher relative to April 2019, but it declined by 4.8% relative to March 2020. The surge in production growth in these two sectors appears to have plateaued.
Services took a big hit. Transport, wholesale and retail trade, hotels and restaurants, domestic tourism, and community activities were largely shut except for essentials. Agriculture was probably relatively less hit, but hit nevertheless particularly poultry, dairy and fisheries.
Investments came to a sudden stop. Capital goods imports (year-on-year) declined 65% in April and 47% in May.
Evidence on recovery
Even though the virus situation kept deteriorating, the countrywide shutdown ended at the end of May followed by further removal of restrictions on mobility and assembly subsequently. The economy most probably bottomed out in June-July. The question now is what and how long it will take to sustain the recovery achieved so far and crawl further back towards a higher new normal. Evidence on the strength of recovery is mixed.
On the supply side, the BIGD-PPRC survey shows the percentage of people at work rose from 33 in urban areas in April to 83 in June while in rural areas it rose from 50 to 84, respectively. Google mobility data in August shows increases, although mobility is still down relative to the baseline in retail and recreation (-23%), supermarket and pharmacy (-4%), parks (-4%), public transport (-24%), and workplaces (-30%). However, visits to residentials were 11% higher than the baseline. Ship arrivals in Chattogram seaport increased significantly in July. I receive a couple of SMS offers almost every day from e-Commerce providers.
Early flood is spoiling the recovery enthusiasm. Heavy and prolonged rain in Meghalaya and Assam states of India since June and heavy rainfall in Bangladesh have triggered an onrush of water flows to Bangladesh. Jamalpur, Kurigram and Lalmonirhat are among the most affected districts. The flood situation is now continuing for over 40 days affecting 33 districts and 6.1% of population, according to a recent presentation on floods by the CPD.
On the demand side, according to a recent SANEM survey, business confidence has risen in July compared to the previous quarter which bodes well for investment. FMCG and other retail sales are recovering relative to March-May—computers, TV, phones, washing machines, trimmers. However, according to a report by the global rights group 'Clean Clothes Campaign (CCC)', garments workers lost an estimated $501 million of wages from March to May. This dragged recovery in disposable incomes.
Remittances boomed in July to a historic monthly high of $2.6 billion. This appears to have been driven by increased propensity to remit caused by returnee migrant workers, increased diversion to formal channels caused by recession in hundi business, increased family needs and some seasonal (Eid) factors. Nearly 2,50,000 migrant workers returned in the past four months, according to Brac's Migration Program data. NBR tax revenue collection in July plunged over 22% (y-o-y). VAT collection declined by 40% and income tax by 37%. These cast doubt on the strength of recovery in consumer spending.
Exports did well in July, reflecting clearance of backlogs and restored orders. Buyers are reportedly placing orders for smaller quantities with a 35-40 days lead time, compared with 90 days before the pandemic, according to a TBS report (August 21). The orders being received are estimated to enable no more than 60% to 70% of production capacity in next four months in the apparel sector.
Expansionary policy stance is in place. Fiscal response has come in the form of subsidies, transfers (cash and food), and duty reduction. Monetary expansion through liquidity stimulating measures and refinancing are up for grabs. Banks have disbursed 61.6% of the Tk30,000 crores financial package for large industrial and service enterprises and only 7% of the Tk20,000 crore for the cottage, micro, small and medium enterprises. Two-thirds of the five million "poor" families have reportedly received cash support under the government's cash support program. The jury is out on the differences these are making to the recovery.
The economy's likely trajectory
Hard questions are often described in dollars denominated in billions and trillions. The question on the economy's likely trajectory defies any such valuation because of the strange ways in which the virus is continuing to bring surprises. There is hardly any convincing sign of flattening the curve in Bangladesh. The elasticity of cumulative inflation cases to the cumulative number of testing has increased from 1.1 in March to 1.26 last week. Daily infection rate at around 20% cannot help reviving confidence of external buyers, employers, investors, and consumers. There is virus fatigue in the public as well as the government. There is no real alternative to reopening in a war of every person against every strain of the virus and a social condition of competition in which some have a natural right to everything, regardless of the interests of others.
The geometry of recovery helps think about alternative scenarios. The most optimistic is V-shaped in which the economy returns to the baseline in quick time. The probability of V appears to be diminishing. A delayed recovery is U in which the economy stagnates for a while but not too long. This is perhaps the best we can hope for. W, in which recovery is followed by another dip down followed by recovery, cannot be ruled out particularly if there is a second wave of the virus in Europe and the GCC countries—Bangladesh's largest markets for exports and labor.
The most pessimistic is L in which the economy stagnates for long as in the Great Depression of the 1930s. A lopsided square root – big fall followed by a small rise that tapers off well before rising all the way back -- is showing up in many areas of activity and many countries. Paul Krugman recently mentioned another shape—K. This is when stock prices and individual income of the wealthy rise while incomes of the rest fall and their pains deepen. This is a scenario where inequalities continue to widen rapidly making recovery meaningless for most.
Secular stagnation of the lopsided square root type along with K can result without effective public health (flattening the curve) measures, macro-financial (subsidies, credit and prudential) interventions, redistributive (social protection) actions and structural policy reforms (trade, financial, regulation).
Premium on open mind has magnified
Radical uncertainties on both the demand and supply sides make predictions hazardous. We know the economy, locally and globally, will hinge. We do not know which way and when. The virus is likely to determine the economy's trajectory. The biology, physics, chemistry, and economics of the virus are better understood today than eight months ago. The economy is unlikely to go back to pre-virus level of activity without flattening the virus spread curve until vaccines or therapeutics become widely available.
Progress on flattening the curve in Bangladesh is critical for reconnecting with the global economy in goods and services trade, FDIs and labor migration. There still are too many unknown, unknowns which has increased the premium on keeping minds open and not getting carried away by wishful thinking that nothing bad can happen in Bangladesh.