Lessons from Q2 and the recovery so far - Capital Economics
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Lessons from Q2 and the recovery so far

Global Economics Update
Written by Jennifer McKeown
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Data for Q2 revealed widespread drops in GDP, but the extent of the damage varied markedly depending on the length and severity of lockdowns. Recoveries since then have followed the same pattern. Looking ahead, Asian economies including China and Korea should continue to outperform given their success containing the virus. But uncontrolled outbreaks in India and Latin America will see them lag behind.

  • Data for Q2 revealed widespread drops in GDP, but the extent of the damage varied markedly depending on the length and severity of lockdowns. Recoveries since then have followed the same pattern. Looking ahead, Asian economies including China and Korea should continue to outperform given their success containing the virus. But uncontrolled outbreaks in India and Latin America will see them lag behind.
  • Q2 GDP data have now been released for several economies, revealing a range of outcomes between an 18.5% q/q slump in Spain and an 11.5% q/q rise in China. (See Chart 1.) The US posted a 9.3% q/q fall (32.9% annualised) while Korea saw a dip of 3.3% q/q. Data are not yet available for most economies, including the UK, Japan and India, but monthly data imply that the former was particularly hard hit. Chart 2 shows the total decline from the pre-virus level to the trough in Q2 (or Q1 in China’s case).
  • It still seems that the key driver of this divergence has been the length and severity of lockdowns. Both China and Korea saw containment measures ease markedly from early in Q2 as the virus was brought under control. But at the other end of the scale, lockdowns intensified in Mexico and India at the end of Q1 and remained intense during Q2 as the virus spread. Meanwhile, draconian measures were also kept in place in the UK and Spain despite some loosening from May. The Oxford University Lockdown Stringency Indices illustrate these broad trends. (See Chart 3.) And if we plot them against GDP outturns, there is a clear correlation between the severity of the lockdown and the extent of the hit to GDP. (See Chart 4.)
  • Where a breakdown by type of expenditure is available, this has typically revealed that consumer spending was the main driver of falls in GDP. (See Chart 5.) Investment fell to a lesser extent and there were drags from net trade in the US, Spain and France. Korea saw consumption pick up as containment measures were eased, but net exports continued to weigh on activity. Meanwhile, China saw a boost to net trade as exports of PPE, technology and medical equipment strengthened.
  • But what of the recovery? We already know from the hard data that some of the slump in retail sales had already reversed by the end of Q2, in May and June. Chart 6 shows that the most marked improvement has been in the US, where sales were already above their pre-virus level in June. Where monthly GDP data are available, in the UK and Mexico, these imply that April and May marked a trough.
  • The positive trend seems to have continued at the start of Q3. PMI indices for July saw broad-based increases and our timely Mobility Trackers confirm that people are returning to shops and workplaces. The Trackers cannot tell us how much people spend or produce once they get to those places. But for what they are worth, they imply that the recovery is relatively advanced in Germany and Russia while those in India and Mexico have been a lot slower. (See Chart 7.)
  • Drawing the relevant indicators together for the major economies allows us to estimate how much lost activity has been made up. We suspect that Spain and the UK are furthest below pre-virus levels, although India and Mexico’s positions are not much better. (See Chart 8.) The US is now perhaps 6 or 7% below its pre-virus level, while Korea is just a few percent below and China about 3% above its pre-virus level.
  • So what does this imply for the future? The obvious lesson is that countries that have brought the virus under control (typically through previous decisive containment measures and high public compliance) are in the strongest position. Performance will be enhanced in economies with strong policy support, specialism in exporting medical and technological equipment and limited reliance on tourism and consumer services. Asia will stay in the lead, but some northern European economies including Sweden and Germany also look relatively well-placed.
  • The outlook is far gloomier for economies where even draconian limits on economic activity are not enough to contain the virus because of a lack of social compliance or limited access to healthcare. India, Latin America and South Africa are in the worst position and, for some, the prospect of recovery will be further hindered by a reliance on tourism and lack of effective policy support.
Chart 1: Selected Economies’ GDP (% q/q)Chart 2: Peak to Trough Chg in GDP (Pre-virus to Q2)
Chart 3: Oxford University Lockdown Stringency IndicesChart 4: GDP & Average Lockdown Stringency in Q2
Chart 5: GDP by Expenditure Component
(ppt contribution to q/q change in GDP)
Chart 6: Retail Sales Volumes (Jan 2018 = 100)
Chart 7: Capital Economics Mobility Trackers (% diff
from pre-virus level)
Chart 8: Estimated GDP July Vs Pre-Virus Level (%)
 Sources: Refinitiv, Apple, Google, Moovit, Oxford University, Cap. Econ

Jennifer McKeown, Head of Global Economics Service, jennifer.mckeown@capitaleconomics.com