The second quarter of 2020 has experienced the sharpest decline in GDP ever recorded over this period. This significant contraction, of -10 to -20%, compared to the same quarter in the previous year, was of course the result of the political decision to voluntarily halt economic activity in an effort to control the worldwide pandemic of Covid-19. This reduction is unique not only in its size but also in its intentional nature. The severity of the decline in GDP depends mainly on containment, whose modalities and duration have differed from one country to another.
Europe is the most affected by the health crisis, due to the often harsh containment conditions; the drop in GDP in the second quarter ranges from -12.8% (Germany; -6.3% for the year 2020) to -23% (France; -9% for the year 2020).
Great Britain has suffered from a similar health context, after a period of denial. The stress of Brexit is added to the health stress. GDP was expected to fall by -15% in the second quarter, and by -8% for the year 2020.
Japan is limiting the decline in its GDP (-5%) thanks especially to its reliance on China, whose GDP is expected to grow by 1% in 2020.
After undergoing a considerable shock in March, commodity market have recovered, which suggests a less gloomy future for producer countries, often emerging countries such as Brazil (nevertheless, its GDP decline in 2020 will be -8%).
The intentional shutdown of activity is not a recession. The conditions for reopening economies and the psychology of the players involved (households and companies) will be crucial to ensure the cessation of activity is not followed by a recession in the second half of the year. The proactivity and voluntarism of the monetary and political authorities should limit this risk.
(All data calculated in relation to the same period of the previous year. Source: FACSTET, or IMF as indicated in the commentary)
In the USA, the economic situation has deteriorated and remains very uncertain. The labour market has been very responsive, as usual, to the general economic downturn. The American economy, despite the measures taken by the government to limit the impact of the health crisis, has wiped out more than 21 million private jobs in 3 months, i.e. as many jobs as it has created in 20 years (the American economy employed 132 million people in the private sector in 2001, and 152 million just before the health crisis). The situation has already started to recover because of early deconfinement measures in some states: job creation reached 2.7 million in May and 4.8 million in June (about a third of the jobs destroyed were re-created in two months). Some indicators show a vigorous recovery, but there are many optical effects. Leading indicators such as ISM Services (back to pre-crisis levels) or consumer confidence (up 12.4 points in May-June after a 46.9 point drop in March-April) have regained much of the lost ground. Nevertheless, the situation on the health front remains tough, and at the beginning of the third quarter, the health crisis in the United States seems to be lacking in control, due to measures deemed ineffective and late in some states, cities or counties. The measures taken by the Central Bank have prevented a financial crisis. Within a few weeks, financing circuits have reopened, and companies have managed to finance themselves despite the risk of default, which usually limits investors’ appetite for corporate debt. Despite all the measures taken by the government, which will result in a sharp increase in the deficit, which is expected to reach between 15 and 20% of GDP in 2020, the IMF expects the GDP to fall by -8% in 2020. It will be most concentrated in the second quarter (-11.9% according to the consensus of Factset economists). Uncertainty remains high for the third quarter.
The economy of the euro zone is slowly recovering, after a strict lockdown in the southern countries. The euro zone was affected by the health crisis before the USA, and its containment conditions were harsher, especially for the southern countries (Italy, France, Spain). These factors explain why the decline in activity is more significant in Europe: the drop in GDP could be more than 10% according to the IMF. National governments and the ECB have deployed support measures for activity, involving considerable amounts, as in the USA. These support measures should be combined with stimulus measures at the European level, totalling euro 750 billion. The fall in GDP is unequalled in the second quarter: Factset consensus economists forecast GDP falls of -12.8% for Germany, -23% for France, -17.2% for Italy, -19.1% for Spain… Germany is by far the country least affected, probably because it has made the biggest effort to support its economy. The health crisis is widening pre-existing gaps in economic performance.
In Great Britain, the scenario is similar. British GDP, which is still very dependent on the European economic situation and faces the same containment after a short period of denial, is also very affected in this context, to which must be added the still strong uncertainty about Brexit’s conditions. As in the rest of the world, it is in the second quarter that the decline will be the most significant, -15% according to the Factset consensus. The decline in GDP over the year 2020 should reach -8.5%, while the IMF fears a contraction of -10.2%.
