How the Global Economy Fared in the Second Quarter
As the Covid-19 pandemic spread from China to other parts of the world in the early part of this year, it was quickly evident that its impact on the global economy would be substantial. Moreover, as the pandemic spread to Europe, the Americas and other parts of the world in March and April, it became clear that the economic results for the second quarter of 2020 would be among the worst ever recorded. With lockdowns being imposed on most of the world’s leading economic centers, and with many of the world’s leading economic sectors suffering from dislocations to their supply chains, distribution networks and much more, it was certain that global economic output in the second quarter would shrink at a record pace. In the end, the results were as bad, if not worse, than had been expected.
In the early stages of the Covid-19 outbreak, it was hoped that the outbreak could be contained in China, if not to just Wuhan and its surrounding region. Nevertheless, this led to fears that the impact on the global economy would be substantial, as global supply chains that were dependent upon Chinese manufacturers were interrupted and consumer and business spending in China (the leading generator of growth for the global economy) fell sharply. Eventually, as the outbreak spread to Europe and then to other parts of the world, it became clear that the impact on the global economy would be far worse, and this led to massive declines for commodity prices, share prices (albeit for a short period) and corporate profits. At the same time, huge numbers of jobs were either lost, or were replaced by government-led furlough schemes. As the economic pain increased, governments were forced to step in and dramatically increase public spending, raising them to levels normally associated with wartime.
Developed Economies Suffer Massive Losses
For most of the world, the peak of the first wave of this pandemic and the lockdown measures that were put in place to slow its spread was during the second quarter of this year. Many of the world’s hardest-hit countries were those with highly-developed economies, particularly those with a high degree of dependence upon exports, foreign investment and tourism. Overall, developed economies contracted by a staggering 11.9% on a year-on-year basis in the second quarter.
While all developed economies shrank in the second quarter, some performed better than others. For example, developed economies in the Asia-Pacific region such as South Korea, Australia and Taiwan not only did a better job of slowing the spread of the pandemic within their borders, but they also recorded much smaller contractions than all other developed economies. In North America, the contractions were greater, with the United States’ economy shrinking by 9.1% year-on-year in the second quarter and with Canada’s economy contracting by 13.0%. The worst hit region was Europe, were massive contractions were recorded in Spain (-22.1%), the United Kingdom (-21.7%), France (-18.9%) and Italy (-17.7%). Even without the pandemic, the European economy was expected to fall into a recession this year, but these results were truly shocking.
Most Emerging Markets Also Experience Sharp Declines
This devastation was not limited to the world’s wealthier countries, for most emerging markets also suffered huge losses in the second quarter of this year. For most emerging markets, the determining factors in their second quarter performance were how severe their lockdowns were and how dependent their economies are on exports, foreign investment and tourism. Overall, emerging markets are estimated to have declined by 6.7% on a year-on-year basis in the second quarter of this year.
On the positive side, after contracting by 6.8% year-on-year in the first quarter of this year, the Chinese economy returned to growth in the second quarter (3.2%). In contrast, India’s economy suffered a devastating 23.9% contraction in the second quarter, a much worse result than had been expected. Severe declines in economic output were also recorded in nearly all Latin American economies, including Peru (-30.2%), Mexico (-18.7%), Colombia (-15.7%) and Brazil (-11.4%). Even some Southeast Asian economies that had been among the fastest-growing economies in the world prior to the pandemic suffered massive losses in the second quarter.
Winner and Losers
Too few countries or industries emerged from the devastation of the second quarter in a position stronger than the one that they were in prior to that period. Certainly China’s near-term position in the global economy was strengthened by the fact that it had already emerged from the worst effects of the pandemic by the second quarter. In fact, even as many Asian economies suffered severe declines in output in the second quarter, it is likely that this crisis, just like the Financial Crisis a little more than a decade earlier, has further tipped the balance of global economic power towards Asia, particularly as that region is likely to attract a larger share of investment in the coming years, just as it did in the years after the Financial Crisis. Meanwhile, countries such as the United States, South Korea and Sweden that hold strong positions in high-tech and high-growth sectors of the economy managed to avoid suffering the scale of decline witnessed in many other economies.
In contrast, there were too many countries and industries that have suffered long-lasting damage to their position in the global economy as a result of the travails of the second quarter. For example, regions that had been struggling to generate economic growth prior to the pandemic, such as Latin America, the Middle East, Russia and others, suffered some of the greatest losses in the second quarter. In particular, Latin America, which has been the region with the lowest level of economic growth since 2014, suffered devastating human and economic losses as a result of the Covid-19 pandemic. Meanwhile, Europe’s long-term economic struggles continued as that region remains over-exposed to external shocks due to weak domestic market growth and a failure to develop many new high-tech and high-growth economic sectors in the 21st century. Finally, while China’s near-term position in the global economy appears to have improved on a relative basis as a result of the pandemic, it could face many negative long-term ramifications as protectionism rises in many parts of the world and as governments force businesses and investors to pull more of their operations and financing out of China as this crisis has exposed their dependence upon China for many essential goods.
A Look Ahead to the Remainder of 2020
As we look ahead, it appears that hopes for a V-shaped recover were overly optimistic. Sure, a few countries may be able to return to higher levels of economic growth relatively quickly, but it looks as if most countries will experience uneven and intermittent recoveries over the remainder of this year and throughout the following year.
At the same time, the Covid-19 pandemic is far from over and it can still go in many directions. For example, many experts are warning that the Northern Hemisphere faces a new wave of the pandemic in the coming months as colder temperatures spread across that part of the globe. Meanwhile, there remains a great deal of uncertainty surrounding the development and distribution of vaccines for Covid-19, making it hard to determine when a full economic recovery can take place. While it appears that the worst is behind us in terms of the immediate economic impact of the pandemic, there are certainly some challenging times ahead for the global economy.