Knoema Global Economic Outlook | Q2 2020 Explained

(14 October 2020)  The corona-crisis is different from past economic recessions in that it has touched all economies without exception. But if we look from economy to economy, we quickly observe that the economic consequences of the corona-crisis are far from uniform. To understand why, for example, GDP in Korea dropped just 2.8% YoY in Q2 2020 while India experienced a 23.9% YoY contraction, we collected key macroeconomic indicators for Q2 2020 for the world's 15 largest economies.

At first blush the data was disappointing, because the economic strain appeared again to be rather heterogeneous across countries, with a spread of more than 20 percentage points of GDP growth. And, as expected, we found that GDP growth differences among countries could be explained by differences of household consumption and fixed capital investment growth rates, two GDP components that combined account for 70-90 percent of GDP. 

Where the macroeconomic data for Q2, what we consider to be the depth of the corona-crisis, is more revealing and in some cases counterintuitive is within those indicators driving consumption and investment behavior. Here were our key findings:

• 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.
• The service sector, overrepresented by small businesses, has suffered acutely during the pandemic because of restrictions on activities that involve person-to-person interactions. As result, economies with the larger share of services sector has been hit harder by pandemic.
• The efficiency of government fiscal stimulus programs, including money transfers and tax incentives, is 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 which imposed the more stringent restrictions compared to developed countries.
• 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, which, combined with a decrease in imports, helped support those economies. 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 this macroeconomic data collection.