Chief Economist Michael Taylor gives ACCA’s Covid-19 Economic Briefing 4 May 2020

The harsh economic effects of the lockdowns across the world are beginning to emerge in hard data.

One of the most dramatic is the weekly jobless claims in the US – since mid-March over 30 million US workers have lost their jobs, around 18% of the US labor force.

The unemployment rate will rise from under 4% as recently as February to probably well over 20% in coming months. Unemployment in Europe will rise too but less dramatically, given the more widespread use of wage subsidies and furlough schemes designed to maintain employment levels. Nevertheless, economic activity throughout Europe is collapsing: the preliminary first quarter GDP release for the euro-zone showed a 3.8% quarterly drop, the largest since records began in 1995. This fall includes just one month of the effect of containment measures, the second quarter data will show a much bigger collapse in activity across the euro-zone. Already, April’s monthly Purchasing Managers Indices (PMIs) have plunged to all-time lows both in the EU and the UK.


Both advanced and emerging economies in recession  

Meanwhile the IMF and OECD have updated economic forecasts that were last published in January when the outlook was rather different. It is now certain that this recession will be deeper than that during the global financial crisis of 2008-09. The IMF now expects global GDP to contract by 3% in 2020. For most advanced economies the fall in GDP this year is predicted to be greater; 6% for the US, 7.5% for the euro-zone and 6.5% for the UK. The IMF note that both advanced and emerging economies are in recession, the first time that this has occurred since the Great Depression of the 1930s.  Emerging market economies are likely to be particularly hard hit by this crisis: many have health care systems ill-equipped to deal with the pandemic and are unable to provide a policy response of sufficient scale.  


Initial falls in GDP may be 25% or more

The OECD has estimated the impact of the initial containment measures on GDP across several countries with most advanced economies expected to see falls in GDP, concentrated mainly in the April to June quarter, of between 20% and 25%. An unusual outlier is the UK’s Office of Budget Responsibility (OBR) which tends to produce close to consensus forecasts. But the OBR has pencilled in a whopping 35% collapse in UK GDP in the second quarter, a much bigger fall than most other economists.

The current round of forecasts is subject to an even greater degree of uncertainty than usual. Never before have large parts of economies been shut down as an act of government policy. It is impossible to judge with any accuracy just how far economic activity will fall; all that can be said is that it will be unprecedented both in scale and in the short period of time over which it is taking place.


When and how will recovery come?

The key economic issue is the nature of the recovery, how quickly will activity rebound once restrictions are removed. Clearly much depends on the duration of the lockdowns – the longer these last the greater the economic damage that will be done by extensive job losses and business failures. The extensive policy measures that governments have put in place cannot prevent job losses and business failures. The longer lockdowns persist, the greater the risk of this ‘economic scarring’ that will hinder recovery.  A second wave of infections that results in the re-imposition of lockdowns would increase the risk of more permanent economic damage.

We assume that lockdowns are lifted gradually after a relatively short period of two or three months and with no significant second waves that require renewed lockdowns. This does seem to be the pattern so far in China and South Korea for example.


Lessons from China – continued consumer caution

As the source of the virus, China is furthest down the recovery road as well as suffering the economic effects first. (Official data record GDP falling by 10% in the first quarter compared with the last quarter of 2019.) Many restrictions were lifted at the beginning of March and data for the month reveal a pattern of a fairly strong recovery in manufacturing output but continued weakness in consumer spending. This may be due partially to the nature of the policy response in China, which concentrated on supporting industry rather than providing direct support to households. But there is also evidence of continued caution and risk aversion among consumers. For example, many cinema complexes, which had reopened were quickly closed again due to very poor attendances. Shopping malls remain sparsely attended too.  In March retail sales were still 16% lower than a year earlier with clothing sales down 30% for example.

The evidence from China is limited and covers a short period so the picture may change in coming months. But there is survey evidence that points in this direction too. For example, a recent YouGov poll reported that even after reopening over 50% of people in the UK would be ‘uncomfortable’ about visiting each of restaurants, coffee shops and pubs and bars. Although not polled in this survey it seems likely that such caution would extend to travel and tourism as well. Some areas of household consumption may bounce back fairly quickly, including spending on home improvements and on consumer durables. But such spending will not be sufficient to drive a robust consumer recovery. Consumer caution may last for as long as social distancing rules continue, which may well be until a Covid-19 vaccine is widely available, possibly as late as the second half of 2021.


Some sectors may recover quickly

The supply-side of economies – or output – may recover more quickly than consumer demand. Many firms have successfully adapted to remote working for their employees and will be able to respond with increased output when economic conditions improve. In other sectors, such as housebuilders and carmakers for example, widespread adaptations that allow for activity to resume while maintaining social distancing are now in place.  But there has to be doubt as to whether companies will restart or initiate investment spending, given that many will face balance sheet constraints and future demand will be highly uncertain.  


Economic growth will resume at a modest pace

The conclusion is that economic recovery is not likely to be V-shaped with an immediate and vigorous rebound mirroring the speed and scale of the downturn. Instead recovery is expected to gather momentum over a few quarters as economic conditions gradually improve. The policy measures introduced by countries should help this process notably via the ‘bridge of income’ supplied to households and firms. (The IMF estimate that the global value of support measures at mid-April was worth $8 trillion.)

It may be well into 2021 before growth rates gather momentum and even then, many industries are likely to be still adjusting to the post-COVID-19 environment limiting the recovery in output. Indeed, the pre-crisis level of economic activity may not be reached until well into 2022 or later.


No Great Depression scenario

But a Great Depression scenario is extremely unlikely: the 1930s depression was to a large extent caused by policy mistakes – central banks and governments tightening policy into a downturn. Clearly that is not the case now where governments are committed to doing ‘whatever it takes’ to support incomes and businesses and central banks are providing liquidity and cheap funding on an unprecedented scale.

To sum up, we expect a very severe global recession, followed by a gradual recovery gathering pace as conditions gradually return to normal. But there will not be a prolonged, multi-year world recession with very high rates of unemployment that could be described as an economic depression.


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