The GDP and employment impacts from COVID-19 and our response to it have been horrific, but there is light at the end of the tunnel
Countries that have effectively dealt with COVID-19 are turning their attention from the health impact towards the economic disaster. The scale of the lost output is becoming clear and the road to recovery is arduous. Are you ready for the journey? Debates at this point around what should we do/have done to mitigate COVID-19 are a bit tired. The focus should be on how bad the economic impact is, who is affected, and what can we do about it.
This post will talk about how bad the economic impact of COVID-19 is around the world. The emerging data from international institutions paints a gloomy picture, but there is cause for optimism as we head towards the "new normal" - whatever that might be.
For countries lucky and skilled enough to only be experiencing a single hit, 2020 is an awful year, but the worst is probably behind them. Countries like New Zealand, Germany, Switzerland and Korea appear to have largely dealt with COVID-19 and are recording low case numbers. If they can keep the virus at bay they will be in a good position to support recovery through domestic stimulus.
Forecast GDP declines for countries experiencing a single hit are in the range of 6%-10%. Or 1% if you are lucky enough to be in South Korea. The IMF's estimates are broadly similar at 8% for developed countries, 3% for emerging economies and 5% globally. Unemployment is forecast to reach over 10% in many countries.
A big part of the challenge is the concentration of this impact. It has mostly been felt over a single quarter with output falling by 40% plus. Naturally, with the intensity of the economic downturn for that period, people will question whether their governments made the right choice around lockdowns, particularly if they lost their jobs. Governments are spending furiously to support the recovery and help those who have been affected. The stimulus we are seeing is essentially one way to "spread" the cost of the disease to the future. Future taxpayers are going to pay big time for what governments do today.
At least countries experiencing a single hit are in a position to recover, unlike countries experiencing the dreaded double hit. Though it might be more accurate to say these countries never dealt with COVID-19 in the first place.
With a second outbreak comes new cases and economic suffering. Countries experience a double hit of coronavirus if widespread transmission resumes due to the relaxing of social distancing or border controls. The United States is looking at a double dose having never beaten it in the first place. US cases appear to flatten off before resuming exponential increases in June. The annual fall in GDP for the US is estimated at 8.5% in the event of a double hit, 1.2% higher than a single hit. US unemployment is forecast to reach 17%. The OECD has GDP falling about 17% across the OECD in Q4 2020 in the double hit scenario. The second hit isn't forecast to be as bad as the first but is obviously worth avoiding.
To a large extent whether the economic recovery curve is V-shaped or W-shaped is a macro question. If a few countries fail to control COVID-19 this will affect the recovery of everyone else, as it makes it more difficult for trade and tourism to resume in earnest. This is particularly the case if those countries have big economies.
Coming from New Zealand, I feel we are geographically blessed. Most of the time it is frustrating being this isolated. Flights are expensive and getting to Europe takes 20 hours plus. But with COVID-19, we were lucky. Being far away from the action gave us time to see what was happening internationally and learn before the disease reached our shores. Our isolation combined with some of the toughest social distancing restrictions in the OECD meant we beat COVID-19 relatively quickly. That being said, the lockdown has been economically disastrous. Our GDP is forecast to fall by about 9% in 2020. However, that fall in GDP appears broadly comparable to many other countries.
South Korea is truly impressive beating COVID-19 without a government-mandated lockdown. They had some of the loosest legislated social distancing restrictions in the OECD, and yet still had very low case numbers. Remarkable. That probably explains part of why their fall in GDP is only forecast to be around 1%. South Korea learnt a lot from the 2015 MERS coronavirus outbreak. They managed to beat COVID-19 through extensive testing, contact tracing using big data and voluntary social distancing. South Korea is an excellent case study in how manage a pandemic without a heavy-handed government lockdown - but of course the fight isn't over yet.
At the start of this post, I stated that we have cause for optimism. And we do. Not much has actually been destroyed because of COVID-19. The infrastructure is still there. The buildings, roads, rail and houses still exist. The human capital and knowledge is, for the most part, still there. Yes many more people are unemployed and businesses have failed, but the skills people possess are still with them. It is important to recognise that - as it is a key enabler of economic recovery. Life won't be the same for awhile, but that isn't necessarily a bad thing.
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