Canada joined France, Germany, Italy, Japan, the UK and the US on Friday in reporting that its economy shrank significantly in the first half of 2020 in due to the pandemic. Canadian economic output fell 11.5% between April and June, the largest drop since 1961.
Now, six months after the coronavirus outbreak began to accelerate rapidly outside of China, it is increasingly clear that countries will not rebound in tandem. The impact of the virus, public health policy and stimulus measures are creating divergent paths, with ramifications that could last for years.
“It is the virus and vaccine pathway that is critical to the recovery,” said James Knightley, ING’s chief international economist.
Ben May, director of global macroeconomic research at Oxford Economics, attributes this weakness in part to statistical factors, including how the government accounts for inflation. But he also highlighted the importance of consumer spending to the UK economy, which amplifies the effects of social distancing, as well as the UK government’s initial reluctance to impose strict quarantine measures.
“The UK government has been criticized for taking too long to lock down the economy and effectively allowing the pandemic to take hold in the country more firmly,” May said in a recent note to clients.
Even countries that closed earlier than the UK have suffered dramatic economic downturns, the number of coronavirus cases and government decisions on when to reopen offices and restaurants dictating the extent of the damage.
While all G7 countries suffered their worst GDP drop on record, France appears to have been hit harder than Germany in part because of the extremely hard quarantine it adopted in April, according to the economist. of Berenberg Bank Florian Hense. And while Italy emerged as an epicenter of infections in March, its decision to impose movement restrictions early could have put it in place for a slightly less severe second quarter than expected.
Parts of the US economy began to reopen in May, meaning the decline was not as steep as initially expected. But that could simply lead to a weaker July-September quarter, especially as a spike in cases in Sun Belt states in June forced some local officials to reimpose restrictions at the end of the month.
Moody’s Analytics and CNN Business’s Back to Normal Index shows the US economy is operating at 78% of its early March level.
What happens after
The obvious outlier among major economies is China, which catapulted into recovery mode in the second quarter after declining GDP between January and March, its worst performance in a three-month period in decades.
As the initial hub of the epidemic and the first in the world to impose drastic measures in an attempt to control the spread of the virus, China was the first major economy to reopen. This gives it a head start.
Where these countries go depends largely on the virus and the vaccine race, Knightley said, with some economists warning of the possibility of a double-dip recession in which production falls again.
They also warn that while a strong rebound is expected in the third quarter, it may not dictate the long-term trajectory, despite huge cash injections from central banks and massive increases in government spending.
A rapid increase in severe cases could prompt governments to reintroduce strict lockdown measures. This would undermine consumer confidence a second time, cut spending and investment, and derail the recovery.
Government relief efforts also have a vital role to play in determining the next stage of savings. In the United States, Democrats and Republicans still cannot agree on a fourth stimulus package. Although President Donald Trump has taken executive action to improve unemployment benefits in the absence of a deal, adding $ 300 a week to state unemployment checks, the lack of more comprehensive measures is a risk, according to Knightley.
The extra $ 600 a week that unemployed Americans received until July has given a big boost to consumer spending. Even as unemployment skyrocketed, personal income in the United States rose 10.5% in April as the government provided additional support and cut $ 1,200 per check.
Goldman Sachs strategists estimate that the forfeiture of the $ 600 benefit will lead to a $ 70 billion drop in personal income in August, affecting both consumer spending and retail sales. With consumer services driving about 70% of the US economy, this could create problems.
Germany, meanwhile, recently extended the length of its program that keeps workers on corporate payrolls by cutting wages until 2021.
May, of Oxford Economics, said another crucial factor could be public confidence in the government’s response. If people don’t trust government leaders to make decisions in their best interests, it could limit spending, he said.
A Pew Research Center survey of 14 advanced economies released this week found that a majority of Americans and Britons did not believe their country had done a good job with Covid-19.