Estimating the economic impact of the COVID-19 shock

July 8, 2020 | Vanguard Perspective

Estimating the economic impact of the COVID-19 shock

The unevenness of the COVID-19 pandemic's effect on economic growth across sectors and by geographic region requires an inspection of both traditional economic data and higher-frequency indicators. New Vanguard Global Macro Matters research analyzes these data in estimating when major economies may approach a full recovery. We expect China to do so more quickly than the United States, the euro area, or the United Kingdom.

How industries will be affected by the pandemic

The impact of containment measures for COVID-19 is not equal across industries. Sectors that are highly reliant on face-to-face interactions, such as retail trade, hospitality, and transport, are experiencing a large shock to activity. However, sectors that can operate relatively well with social distancing in place, such as construction and manufacturing, are less affected.

The COVID-19 shock will have a varied impact on different sectors of the economy

The COVID-19 shock will have a varied impact on different sectors of the economy.

Notes: Size of bubbles indicates the relative weight of each sector in U.S. GDP. Initial impact on the level of GDP and the persistence of shock estimated is based on a range of high-frequency indicators (such as mobility indexes, fuel consumption, retail foot traffic, and restaurant and hotel occupancy), and traditional economic indicators.

Sources: Google, Apple, Johnson Redbook Index, American Iron and Steel Institute, U.S. Department of Energy, Association of American Railroads, U.S. Bureau of Labor Statistics, Prodco Analytics, Smith Travel Research, OpenTable, Transportation Security Administration, and SimilarWeb.

GDP forecasts across countries

The figures show our baseline forecasts of the level of GDP for the United States, the euro area, China, and the United Kingdom. In the U.S., we expect output to be more than 10% lower in the second quarter of 2020 before staging a slow and gradual recovery. U.S. GDP is not expected to get back to its pre-virus level until the end of 2021, and it likely will be well beyond that before it closes the output gap.

Expected path of GDP across the U.S., the euro area, China, and the U.K.

Baseline forecast

Expected path of GDP across the U.S., the euro area, China, and the U.K.

Note: The charts show our expectation for the level of real GDP in each country in its local currency, which has been rebased to December 2019 = 100.

Source: Vanguard.

We expect slightly different trajectories for the level of GDP in other regions. This can be explained by a variety of factors, including:

  • Differences in the timing and severity of outbreaks.
  • Strictness of government lockdowns.
  • Speed of the lockdown exit across sectors.
  • Economy sector composition.
  • Monetary and fiscal policy responses.

For example, China has so far managed to contain the virus more quickly than the U.S. or Europe, and its economy has a smaller share dedicated to services, which rely more heavily on face-to-face interaction. It is therefore expected to recover to pre-virus levels more quickly. Get more insights on the worldwide economic activity in our full research paper below.

Note:

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