Is the world economy recovering?

THE WORST day of the covid-19 pandemic, at least from an economic perspective, was Good Friday. On April 10th lockdowns in many countries were at their most severe, confining people to their homes and crushing activity. Global GDP that day was 20% lower than it would otherwise have been (see chart 1). Since then governments have lifted lockdowns and people have ventured outside. Economies have begun to recover. Analysts are pencilling in global GDP growth of 7% or more in the third quarter of this year, compared with the second.

That may all sound remarkably v-shaped, but the world is still a long way from normal. Governments continue to enforce social-distancing measures to keep the virus at bay. These reduce economic output—by allowing fewer diners in restaurants at a time, say, or banning spectators from sports arenas. People remain nervous about being infected. Economic uncertainty among both consumers and firms is near record highs—and this, research suggests, explains companies’ reluctance to invest.

Calculations by Goldman Sachs, a bank, suggest that remaining social-distancing measures continue to reduce global GDP by 7-8%—roughly in line with what The Economist argued in April, when we coined the term “90% economy” to describe what would happen once lockdowns began to be lifted. Yet while the global economy is operating at about nine-tenths capacity, there is a lot of variation between industries and countries. Some are doing relatively—and surprisingly—well, others dreadfully.

Take the respective performance of goods and services. Goods have bounced back fast. Global retail sales had recovered their pre-pandemic level by July, according to research by JPMorgan Chase, another bank. Armed with $2trn-worth of cash handouts from governments since covid-19 struck, consumers across the world have stocked up on things to make it bearable to be at home more often, from laptops to dumbbells, which partly explains why world trade has held up better than economists had expected. Global factory output has made up nearly all the ground it lost during the lockdowns.

Services activity is a lot further below its pre-pandemic level, largely because such industries are vulnerable to people avoiding crowds. The number of diners in restaurants remains 30-40% lower than normal worldwide, according to data from OpenTable, a booking platform. The number of scheduled flights is about half what it was just before the pandemic struck.

The variation in economic performance between countries is even more striking. It is common for growth rates to diverge in downturns. But the size of this year’s collapse in output means that the differences between countries’ growth rates are enormous. On September 16th the OECD, a club of mostly rich countries, issued fresh economic forecasts. Like other forecasters, it has become less gloomy; projections are less dire than in June, when it last published forecasts. Still, the growth gap between best and worst performers in the G7 group of countries in 2020 is expected to be 6.7 percentage points, far wider than that during the last global downturn a decade ago. Of the big economies, only China is set to expand in 2020. Some countries, such as America and South Korea, face a downturn but hardly a catastrophic one (see chart 2). Britain, by contrast, looks to be in line for its deepest recession since the Great Frost of 1709.


Some economists contend that the huge gap between countries is a statistical mirage, reflecting different methods of computing GDP figures. In Britain, for instance, the way statisticians tot up government spending means that school closures and cancelled hospital appointments have a bigger impact on GDP than elsewhere. But this effect is small—the bulk of the fall in output has come from the private sector.

Instead, performance comes down to three factors. The first is industrial composition. Countries such as Greece and Italy, which rely on retail and hospitality, always looked more vulnerable than Germany. Its large manufacturing sector has been supported by the global goods recovery.

Second is confidence, which appears to be determined by a country’s experience under lockdown. Britain’s poor economic performance is likely to be related to the government’s poor handling of the pandemic. Britons seem more nervous than other Europeans about venturing outside.

The third factor is stimulus. America’s lawmakers may be unable to agree on a top-up, but they have already enacted the world’s largest rescue package, relative to the size of its economy. The OECD thinks it will be one of the better-performing rich countries this year.

What next for the 90% economy? Some national or regional authorities have been forced to order further shutdowns. But others may be able to better calibrate social-distancing measures without jeopardising output. That might bring the world closer to, say, a 95% economy. Indeed, the OECD expects global GDP to recover further over the rest of the year.

It may be tempting to think that a vaccine, if it could be rolled out on a wide enough scale, would quickly restore normality. But there will be scars. Firms’ reluctance to invest today will mean less productive capital in the future. A growing number of American workers believe they will not be returning to their old jobs. Reallocating redundant resources towards more productive firms will take time. Even Goldman Sachs, which is bullish about the prospect for a vaccine, does not see American unemployment falling to its pre-pandemic rate of 4% until 2025. Much as the disease itself has long-lasting effects, the covid-induced downturn will leave the world economy feeling subpar for some time to come.

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