The GDP data for the second quarter of the year published last week for the US and eurozone came in very close to expectations.
Nonetheless, the figures are mind-blowing and unprecedented in terms of the scale of contraction in activity.
In the eurozone, GDP fell by over 12% in the quarter following the decline of 3.6% recorded in the opening quarter of the year.
Meanwhile, in the US, where Covid-19 lockdowns were not as widespread and of shorter duration, GDP contracted by 8.2%, after a 1.3% decline in the first quarter.
In terms of the eurozone, the biggest decline in second-quarter GDP was seen in Spain at 18.5%, followed by France (13.8%), Italy (12.4%) and Germany (10.1%).
Eurostat has not yet published an expenditure breakdown of the eurozone data, but national data show big hits to consumer spending, investment and exports.
In the US, consumer spending was down by 8.7% and investment fell 7.5%, while exports and imports declined by 16% and 13.4%, respectively.
The data clearly show that the sharp contraction in activity as a result of the restrictions imposed to contain the coronavirus pandemic had a severe impact on spending right across economies.
The quarterly data don’t tell the full story, though, as the decline in activity was primarily concentrated in April and early May when economies were in lockdown.
Activity had rebounded strongly by June as shown by recent retail sales, labour market and survey data.
Even in Ireland, which imposed a stringent lockdown and was one of the last European countries to begin easing restrictions, retail sales have had a remarkable journey.
Core retail sales (i.e. excluding the motor trade) collapsed by 24% in April, but had recovered to their pre-Covid levels by June.
They fell by 12% in the second quarter as a whole – coincidentally the exact same decline as eurozone GDP.
The monthly profile here is important.
If Irish retail sales remained unchanged from their June levels in the July-September period, they would rise by 16% on quarter two levels.
We suspect there was an element of catch-up spending in the June data, so they will probably fall back somewhat over the summer from that level.
Nonetheless, a very large rebound is in store for the third quarter.
The same logic applies to GDP.
Even allowing for the surge in new virus cases in the past month, the resulting restrictions imposed have been limited.
Thus, we can still expect to see strong GDP rebounds in most economies in the third quarter, helped also by expansionary fiscal policies, including continuing government labour market income support measures.
The question is what follows then?
This is where the re-emergence of the virus is a real concern.
It is proving far more persistent than originally expected.
Economies are not expected to be put back into large scale lockdown, but social distancing is set to remain in place, with curtailments on travel and some other activities.
There is also a growing risk of long-term scarring – hits to confidence, rising business failures, bankruptcies and permanent job losses – that will restrain the recovery in activity.
Thus, it could prove hard to build on the current rebound in activity.
The IMF has labelled this a partial recovery, with the world economy, while not in a recession in terms of falling output, operating well below par over the next couple of years.
Thus, we may well need major advances in treatments for the virus, or better still a vaccine, for the world economy to shake off the impact of Covid.
- Oliver Mangan is chief economist at AIB