On Friday, Canada joined France, Germany, Italy, Japan, the United Kingdom and the United States in reporting that its economy shrank dramatically in the first half of 2020 due to the pandemic. Canadian economic output shrank by 11.5% between April and June, the sharpest decline in records dating back to 1961.
Now, six months after the coronavirus outbreak began to accelerate rapidly outside China, it’s increasingly clear that countries will not bounce back in tandem. The impact of the virus, public health policy and stimulus measures are creating divergent paths forward, with ramifications that could last years.
“It’s the path of the virus and the vaccine that’s critical to the recovery story,” said James Knightley, ING’s chief international economist.
While Covid-19 delivered a brutal hit to every country’s economy, the magnitude of the shock has varied significantly across the globe.
Ben May, director of global macro research at Oxford Economics, attributes this weakness in part to statistical factors, including how the government accounts for inflation. But he also pointed to the importance of consumer spending to the British economy, which magnifies 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 gain a stronger foothold in the country,” May said in a recent note to clients.
Even countries that locked down sooner than the United Kingdom have suffered dramatic economic slowdowns, with the number of coronavirus cases and government decisions on when to reopen offices and restaurants dictating the scale of damage.
While all G7 countries suffered their worst drop in GDP on record, France appears to have been knocked harder than Germany in part because of the extremely harsh quarantine it adopted in April, according to Berenberg Bank economist Florian Hense. And while Italy emerged as an epicenter of infections in March, its decision to impose restrictions on movement early may have set it up for a second quarter that was slightly less severe than feared.
Some parts of the US economy started reopening in May, which meant the decline was not as sharp as was first forecast. But this may just lead to a weaker July-to-September quarter, especially given that a spike in cases in Sun Belt states in June forced some local officials to reimpose restrictions late that month.
What comes next
As the initial hub of the outbreak and the first in the world to impose draconian measures to try to control the spread of the virus, China was the first major economy to reopen. That’s given it a head start.
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 recession in which output falls again.
They also caution that while a big rebound is expected in the third quarter, that may not dictate the long-term trajectory, despite huge 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 slam consumer confidence for a second time, reduce spending and investment and throw the recovery off track.