GDP Contractions and Covid-19 Deaths

May 24, 2020

Not even a half year has passed since the earliest reports of a new and lethal illness in Wuhan China. The Covid-19 pandemic has been the biggest global news story of 2020 and very possibly will be in the spotlight for a good deal longer. First-quarter real GDP growth estimates have recently been reported in many countries, and they were distorted significantly downward by the lockdown of business activity and social gatherings of all sorts imposed to limit deaths and slow the spread of the illness, which by the end of the quarter had overwhelmed health care systems in many countries. At this writing, 5.477 million cases have been identified, and the global death count is just under 346 thousand. These numbers have most likely been well undercounted. This note attempts to find early correlations between the virus cases and GDP growth last quarter.

Europe, which was the hardest hit area during the black plague in the mid-14th century and the Spanish flu of 1918-19, once again tops the leader board, with 1.9 million reported cases and 169.8 thousand deaths attributed to Covid-19 virus. Euroland GDP suffered mightily as well last quarter, plunging quarterly at a 14.2% annualized rate and posting a 3.2% decline from a year earlier. Among the largest countries using the euro, real GDP contracted at annualized rates of 21.4% in France, 19.4% in Spain, 17.7% in Italy, but just 8.6% in Germany. In Great Britain, where there have now been 259.6 identified Covid-19 infections and 36,793 deaths (Europe’s death leader), real GDP shrank 7.7% at an annualized rate in the first quarter to 1.6% below its year-earlier rate. Results in Nordic Europe have varied, with Norwegian GDP dropped 6.0% annualized but Swedish GDP slid just 1.2%. The death count in those countries has been comparatively low in Norway at 235 but high in Sweden at 3,998. Swedish authorities hesitated for the longest time in imposing any restrictions on social distancing.

The United States was late to take Covid-19’s threat seriously until midway through March and therefore saw GDP decline just 4.8% annualized in the quarter. However, that hesitancy cost many more lives than should have occurred. In America, 1.678 coronavirus cases have been identified, and the death toll is above 99K and fast approaching the 100K level. President Trump and Secretary of State Pompeo have been scathing in their blame of China where the virus first emerged. That sounds like a need to rename the Spanish flu the American flu, because that illness first surfaced in army barracks in Pompeo’s home state of Kansas.

The 1918-19 epidemic has forever been instead called the Spanish flu because that was the hardest-hit country, and on that convention perhaps the Covid-19 pandemic maybe ought to be America’s pandemic because no single country has suffered more deaths than the United States, but we digress. The real irony in the comparison of China and America’s handling of the pandemic is that the two economies represent polar opposite experiences in first-quarter economic growth. While U.S. GDP fell just 4.8% annualized, Chinese real GDP was plunging 33.8% on such terms. But in contrast to America’s 99K death count thus far, China is reporting just 4,634 deaths.

Other Asian countries similarly experienced a relatively low rate of Covid deaths and GDP shrinkage. In Taiwan, just 7 deaths have been reported, and GDP fell 5.9% annualized. Thailand’s death count is 56, and GDP dropped 8.5% annualized last quarter. South Korean GDP contracted 5.5% annualized and reported 266 deaths so far.

In most economies, real GDP will drop much more sharply in the second quarter than the first quarter. With reopening, the third quarter will not be as bad as the second quarter, but reopening places of business alone will not necessarily revive consumer buying habits because many households have suffered catastrophic financial setbacks and many consumer will continue to stay clear of social gatherings. The fourth quarter outlook is murkier still due to the possibility of a second and perhaps more deadly wave of infection.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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