On Friday, Canada joined France, Germany, Italy, Japan, the United Kingdom and the United States in announcing that its economy would shrink dramatically in the first half of 2020 due to the pandemic. Canadian economic production shrank by 11.5% between April and June, the sharpest decline in records dating to 1961.
Now, six months after the coronavirus outbreak began to accelerate rapidly outside China, it is becoming increasingly clear that countries are not returning in tandem. The impact of the virus, public health policies and incentives create divergent paths forward, with ramifications that can last for years.
“It’s the path of the virus and the vaccine that is critical to the storytelling,” said James Knightley, ING’s chief international economist.
While Covid-19 delivered a cruel hit to each country’s economy, the magnitude of the shock varied widely around the world.
Ben May, director of global macro research at Oxford Economics, attributes this weakness in part to statistical factors, including how the government calculates inflation. But he also pointed to the importance of consumer spending for the UK economy, which exacerbates the effects of social distancing, such as the UK Government’s initial reluctance to impose strict quarantine measures.
“The British government has been criticized for taking too long to shut down the economy and effectively allowing the pandemic to gain a stronger foothold in the country,” May said in a recent note to clients.
Even countries previously sheltered like the UK have suffered dramatic economic delays, with the number of coronavirus cases and government decisions on when offices and restaurants should be re-dictated on the scale of damage.
While all G7 countries have suffered their worst decline in GDP on record, France appears to be beating Germany in part harder because of the extremely harsh quarantine it adopted in April, according to Berenberg Bank economist Florian Hense. And although Italy emerged in March as an epicenter of infections, its decision to impose early restrictions on movement may have set it up for a second quarter that was somewhat less severe than feared.
Some parts of the U.S. economy began to recover in May, meaning the downturn was not as sharp as first predicted. But that could just lead to a weaker quarter from July to September, especially given that a spike in cases in Sun Belt states in June forced some local officials to reinstate restrictions by the end of that month.
What comes next
As the first hub of the outbreak and the first in the world to impose draconian measures to control the spread of the virus, China was the first major economy to reopen. That has given it an edge.
Where these countries go from here depends in large part on the virus and the race for a vaccine, Knightley said, with some economists warning of the potential for a double-dip reception in which production falls again.
They also warn that although a major rebound is expected in the third quarter, the long term may not dictate, despite enormous injections of cash from central banks and massive increases in government spending.
A rapid increase in serious cases could prompt governments to reintroduce strict lockdown measures. That would hurt consumer confidence for a second time, reduce spending and investment, and hurt job recovery.
The extra $ 600 a week that Americans received without work until July served as a major incentive for consumer spending. Even as unemployment rose, personal income in the United States rose 10.5% in April as the government provided additional support and cut $ 1,200 checks.
Strategists at Goldman Sachs estimate that the decline in favor of $ 600 will result in a $ 70 billion decline in personal income in August, both consumer spending and retail sales. With consumer services driving roughly 70% of the U.S. economy, that could create problems.
Germany, meanwhile, has recently extended the length of its program to keep workers on company wages by earning their wages until 2021.
Oxford Economics’ May said another crucial factor could be public confidence in the government’s response. If people do not trust government leaders to make decisions in their interest, it can keep the lid on spending, he said.
.
