The numbers are coming in and they are not looking pretty – not that anyone expected them to.
The US economy shrank 9.5% in the three months ended June, from the previous three months. On a year-on-year basis, the fall was even sharper – 33%.
Germany, the most important country in Europe, saw its economy shrink 10.1% sequentially and 35% year-on-year. For France, the numbers were 13.8% and 19%; and for Spain 18.5% and 22.1%. Italy, which was ravaged by the coronavirus disease (the cause of the fall in all these economies – in case that wasn’t clear), saw its GDP fall by 12.4% in the quarter on a sequential basis, and 17.3% on a year-on-year basis. Overall, the eurozone economy contracted 12.1% sequentially and 15% year-on-year.
The fall has been brutal for some countries – Spain, for instance, finds its economy exactly where it was (in terms of size) in 2002.
The US numbers, which show the sharpest fall in 70 years, are the most worrying. They have come against the backdrop of hundreds of billions of dollars of direct fiscal stimulus in the form of payments to individuals and businesses. Without those, the fall would have been sharper. The US is the world’s largest economy and the ripple effect of its poor performance will be felt everywhere.
It is unlikely the US economy will recover in the third quarter (the April-June period was the second quarter for the country, as it was for many others that follow the calendar year), given the spike in Covid-19 cases in the country where things seemed to be getting better in May, even June. Since then, though, there has been a spike, with cases rising in states that weren’t badly affected in March and April, and also in those which were among the first to open up after lockdowns. Germany is better off, simply because it seems to have managed the pandemic better (it, too, announced generous fiscal support) and analysts expect the country to stage a so-called V-shaped recovery.
All of this was expected – the economic numbers may have not met estimations (which themselves have become very difficult at this time) – and that the coronavirus disease, and the disruption it has wrought on life and work (and not only from lockdowns), would take a toll on the economy was a given. The question is, how soon can an economy get back to its pre-pandemic levels? And the question is, how can a country protect itself from further coronavirus disruptions, which are inevitable?
The second is easier to answer: by aggressive testing, tracing, and isolation; by ensuring that everyone wears a mask and practises social distancing; and by prohibiting large gatherings.
With adequate fiscal and regulatory support, a country that does this can hope to grow its economy back to pre-pandemic levels soon.
Quoting analysts at JP Morgan, The Wall Street Journal reported that Germany’s economy will get there (its pre-pandemic size) by the end of 2021. The US economy, the report added, would still be “around 2.5% smaller at the end of 2021”.
India’s GDP numbers for the April-June quarter, its first (the country follows the April-March financial year), are expected at the end of August (although there’s no certainty that the numbers will be released). For two of these months, India was in a hard lockdown, albeit with some exemptions which came progressively through this period. According to the Nomura India Business Resumption Index (100 signifies pre-lockdown level business activity), India ended June with business activity around 30 percentage points below the March-level. And for April and much of May, this gap was actually at least 50 percentage points. That doesn’t bode well for the first quarter GDP.
The consensus of economists is that the Indian economy could shrink by at least 5% this year. At constant prices, that will take the economy to pre-2018-19 levels – and the country can ill afford to lose two years (assuming that the economy rebounds sharply in 2021-22, which will be a challenge). The government has announced a plan; it now needs to follow up with direct fiscal support.