COVID-19 is unrelenting. Economies are teetering on the brink of further collapse while also considering fresh restrictions to manage the health crisis until help arrives in the form of a vaccine. But, economies are not static.
The COVID-19 pandemic is like no other of the post-World War II period and so is and will be the economic response. The pandemic has spared no economy, even if some are more resilient than others. And, this time around, business did not stand alone in bearing the brunt of the economic woes; households too are shifting their consumption patterns and helping to move economies in new directions. Industries that are thriving, from pharma to electronics to renewable energy, may signal new economic paths for those with the ready infrastructure to forge ahead. We invite you to read on and explore the data signals of this crisis and structural adjustments in play for the global economy.
The COVID-19 Pandemic is Unique Among Pandemics of the Post WWII Era
Modern pandemics are characterized by conflicting truths, spreading more easily by virtue of low cost, rapid transport across vast distances while being met with rapid communication, tracking, and counter responses from the technological and scientific communities. So, it’s somewhat unsurprising that while pandemics have accompanied humanity throughout modern history, COVID-19 (to date) has simultaneously imposed the greatest economic cost and been responsible for the fewest deaths relative to any other pandemic of the post World War II era.
The full economic consequences of COVID-19 are clearly yet unknown but are already staggering, dragging down the global economy and fundamentally altering trade patterns that have evolved in recent decades, notably including that between China and the United States, a relationship already strained in the two years leading up to the COVID-19 outbreak. Leading international sources expect a hit to the global economy in 2020 of between 4 and 5 percent. This is in sharp contrast to the economic reality of other pandemics since the 1950s, each of which had almost no noticeable effect on the global economy despite being highly lethal.
- Since the 1950s, the world has been hit by 8 pandemics and claimed 35 million lives, with the vast majority (32 million) attributed to HIV.
- COVID-19 is among the deadliest pandemics since 1950, claiming 0.02% of the global population to date, but trails behind the Asian flu (H2N2 virus, 1957-58) that claimed 0.04% of the global population and the Hong Kong flu (H3N2 virus, 1968), 0.03% of the world’s population.
The Economic Shape of COVID-19
The global economic crisis of 2020 is remarkable not only because of its depth but also its origins. And, no one saw it coming. Let’s discuss.
After an economic decline of -1.6 percent YoY in Q1 2020, Knoema estimates that the global economy contracted in Q2 by another 8.9 percent YoY. Taking into account that the global economy lost about 5.3 percent YoY during the first half of the year, it is now on pace for a total decrease of 4-5 percent for 2020, which is inline with latest estimates from IMF and OECD.
So, what about the origins of this crisis? Through each of the recessions of the post-WWII period, business bore the majority of the burden by reducing investment while household consumption growth remained positive. Today’s economic picture is different and at its center is a decline in household consumption that has led to large-scale economic losses around the world. Under the pressure of anti-COVID restrictions, global household consumption decreased 15 percent YoY in Q2, nearly on par with the decrease in investment (-17% YoY).
What is unfortunately typical about the 2020 global economic crisis is that forecasters were once again too late with their predictions of the economic fallout. Revisions of major economic forecasts arrived only in late March when the first official data on the scale of the pandemic and economic losses from anti-COVID restrictions were published.
In 2019, economic models pointed to an acceleration of world GDP in 2020—under the influence of improved trade relations between the US and China, among other factors—or at least a more or less steady state. General consensus was that the global economy would grow by about 3 percent in 2020, compared with 2.9 percent in 2019. Even in January 2020, the World Bank, UN, and IMF still expected world GDP to increase by 2.5-3.3 percent in 2020.
Knoema’s own end of 2019 analysis of the fundamental factors driving the global economy suggested that despite all the risks that had accumulated, there was no reason to expect these risks would materialize in the short-term as a threat to the global economy of 2020 or that governments and central banks would be unable to rise to these challenges.
Geographics of Global Crisis: Can China Alone Lead the Global Economy Out of Crisis?
The magnitude of the global slowdown means that China alone will not be able to push the global economy out of crisis. The economic recovery of China, India, and the United States will be decisive. Pre-COVID these countries combined accounted for almost 75 percent of global growth (China, 46%; India, 14%; United States, 15%).
A global GDP decline in 2020 within the range of 4-5 percent would suggest that a full recovery to the pre-crisis level in a worst case scenario could stretch out to Q4 2023. But, again, we need the trio of countries to return to growth. As of Q2, China had already returned to positive growth, adding 0.7 percentage point to global GDP. India and the United States remained in negative territory during the second quarter at -2 and -1.7 percentage points, respectively, weighing down the overall 2020 economic outlook even without accounting for the consequences to come from the newly surging daily cases of COVID-19. If you are wondering about a boost from the EU, we can add the EU countries, including the United Kingdom, into the mix and you have another -3 p.p. of global GDP decline in Q2 2020.
If you trust ‘the experts’, the path to economic recovery comes down to two factors, namely, the path of the pandemic’s ultimate peak and decline as well as the scale (read: success) of government support measures along the way even if the epidemiological situation deteriorates beyond expectations. Analysis of economic growth rates and the severity of anti-COVID restrictions on economic activity show an expected and significant negative relationship between these indicators.
China seems to offer a proof point, but one with a dark side, too. Even China’s successful suppression of the pandemic and rapid economic bounceback delivers economic growth that falls 1.5 percent short of its pre-COVID baseline out to 2024, according to latest IMF estimates. (Other major economies face a growth gap by 2024 ranging from 1.8% in Japan to 15% in India.)
Looking around the globe, we found that the more stringent the COVID-19 restrictions imposed by governments, the more household consumption declined. A phenomenon we attributed to tighter restrictions leading to more job losses, less income.
But, we also found that the efficiency of government fiscal stimulus programs, including money transfers and tax incentives, was inconsistent at best and somewhat counterintuitive in practice. For the United States, Japan, and Germany, stimulus programs appear to have prevented more severe economic downturns than were faced in France, Spain, and the United Kingdom. The data also reveals that the tighter the anti-COVID restrictions, the less fiscal stimulus (as % of GDP) governments issued. (Japan is a case in point and one that we’re interested in exploring further.) This phenomena can be partly explained by relatively higher costs of government borrowing in developing countries that imposed more stringent restrictions than some developed countries.
- The correlation between the GDP decline in the world’s 70 largest economies (accounting for 90% of world GDP) in Q2 2020 and an index of stringency of restrictions on economic activity (published by the University of Oxford) is -0.47 and is statistically significant with a 95% confidence interval.
- When adjusted for the structure of the economy (normalizing by the share of the services sector in GDP), the correlation coefficient increases to -56% for Knoema’s 70-country sample.
- For the 15 largest economies (70% of world GDP), normalizing the Stringency Index further by share of private consumption and imports in GDP reveals that the correlation between the stringency of government response and GDP decline in Q2 2020 rose to -0.67.
Looking ahead, a rapid recovery of China’s economy (the current reality!) and slower recovery in the rest of the world could mean that more than half of global growth in 2021 will be generated in China alone. Does that mean that COVID-19 will finally shape China into a global economic leader? China has steadily worked toward this over recent decades, joining the WTO, making headway into multiple supply chain levels to swing the trade balance in its favor (and away from the United States), and now, a new opportunity embedded in the COVID crisis to which China appears ready to seize. In mid-November 2020, China and 14 other Asia-Pacific countries signed a free-trade deal which stands a chance of gradually reducing China’s trade dependency on the US market.
COVID-19 – An Accelerator of Structural and Technological Transformation
We’ve spoken in some sweeping generalities about the world economy. At the country-level, the impact of COVID-19 pandemic, an extreme ‘external shock’ as they say, has been highly varied. Using a 70-country sample, the data confirmed what we all likely intuitively understand – economies with services sectors that make up a larger share of GDP have been hit harder by the pandemic, particularly because the services sector, overrepresented by small businesses, has suffered acutely under restrictions on activities that involve person-to-person interactions.
We also found that in some cases exports were more resistant to external shocks than were imports. Exports in Russia and Brazil even grew slightly in Q2 2020, which, combined with a decrease in imports, helped support those economies during the pandemic. Other factors, such as non-official prohibitions to lay off employees and the share of the government sector in the economy, could also have played important supporting economic roles but these factors are hard to quantify and are not covered in Knoema’s macroeconomic data collection for this analysis.
Beyond the services composition of an economy and its trade balance, the magnitude of the pandemic’s impact can be differentiated by three groups of industries within an economy:
- Industries directly impacted by anti-COVID restrictions and the biomedical situation: tourism and accomodation, transport (especially international air), trade and catering, personal services, education, and cultural and sports activities. At the same time, the demand for pharmaceuticals and some medical services and equipment has increased as has demand for some digital products and services.
- Industries affected indirectly through the overall decline of output and shipping and trade disruptions: energy sector and manufacturing.
- Industries that were not affected or suffered insignificantly: agriculture and food production, information and communication technology, and production of military equipment and weapons.
We analyzed industrial outlooks from international industry associations, institutions, and research corporations to understand their perspectives on the COVID economy and where the industries they represent may be headed. Overall, short term industry outlooks suggest that industries directly impacted by anti-COVID restrictions will face the greatest decline in output and revenue compared to other industries. And, those industries associated with the latest wave of the technological revolution—ICT, pharma, electronics, renewables, and electric vehicles—have and will continue to grow seemingly despite the pandemic and perhaps even on new trajectories because of the dampening effects on investment elsewhere under the burden of COVID-19.
Consider the accelerating effect of the pandemic on the energy transition. While some believe that that peak oil demand is still far off even as the likes of bp expect we’ll never again return to pre-COVID global oil demand levels, the US stock market has already seemingly chosen the green path. For the first time ever, the market valuation of a primary producer of renewable energy has surpassed that of oil majors. On October 7, 2020, the market value of the world’s largest producer of wind and solar energy—Nextera Energy—topped US oil majors Exxon Mobil and Chevron. The market capitalization of Nextera Energy amounted to $143 billion, compared to capitalization of $138 billion and $134 billion, respectively, for Exxon and Chevron.
The data shows that for the past decade long-term investment in fossil fuels trended toward losses rather than profits. Every dollar invested in fossil fuels assets in the best case preserved its nominal value, while each dollar invested in renewables, such as Nextera, ten years ago today would yield almost six dollars.
Conclusion – Lessons Learned From the First Phase of COVID-19 Pandemic
COVID is an unrelenting force. We’re writing this as the COVID cases are surging again and promising vaccines are announced but not yet a reality. We know what the data shows to date. We know that regardless of the reasons for governments’ responses to the COVID-19 compared to pandemics of the past, ‘security’ of one form or another (energy, economic, social, …), has been paramount. And, like the great crises of the past, the current crisis has certainly brought not only disruptions but also opportunities depending on each country’s preparedness and response.
Countries best able to ride out the turbulence now have improved opportunities to gain or expand their footholds among other world economic leaders. Economic disruptions in the wake of WWI led to the emergence of the United States as a new global leader. The COVID-19 economic crisis points to the emergence of China, proving out the power of its own model of economic development and its governing approach to rapidly and efficiently suppress the virus.
That’s not to say there won’t be other countries or industries that step forward to reshape the global economic order. Recession in many traditional sectors of economy and ongoing growth in high-technology industries will intensify the competition in traditional markets like fossil fuels, metals, and agricultural commodities, as well as accelerate the technological and structural transformation of the global economy. Innovations that experts thought would become a reality only in 30 years, may turn into everyday reality within the next decade. And, we’ll be here at Knoema, highlighting the data that illuminates these paths.
- H. Bryson, M. Pugliese, H. Mathews. Fiscal Fallout from the COVID-19 Pandemic: Part I. Wells Fargo Securities. April 20, 2020. Link
- Export prohibitions and restrictions. WTO Information Note. April 23, 2020. Link
- Lardy, T. Huang. Weak exports will not stall China’s manufacturing recovery. PIIE. April 15, 2020. Link