Economic impact of coronavirus in Europe and the world: Are there signs of an upswing?

Things are improving – at least for the moment

Economic impact of coronavirus: When corona infections first appeared in Europe in February, an economic crisis loomed on the horizon. The full extent of the crisis, however, was not yet foreseeable. Half a year later, it is clear that the recession triggered by the corona crisis is much greater than the economic downturn caused by the Lehman bankruptcy. But as of now, it looks as if European economies have touched the bottom and rebounded.

EU economies collapsed by 12 percent in Q2 2020

The slump in the global economy triggered by the coronavirus pandemic is hitting the European Union (EU-27) hard. The Statistical Office of the European Union – Eurostat – reports a decline in gross domestic product (GDP) for the EU-27 of almost 12 percent in the second quarter of 2020. (The largest quarterly decline in EU GDP during the Lehman bankruptcy amounted to only 3 percent (see Fig. 1).

However, it should be noted that the economic crisis caused by the coronavirus is affecting the countries of the EU to varying degrees.

Comparatively moderate economic slump in Germany

Germany is coming through the current recession somewhat better than the EU as a whole. The decline in GDP in Q2 2020 is around two percentage points lower, and in Q1 2020, the economic downturn was also less severe in Q1 (see Table 1 on the right).

The financial and economic crisis of 2008/09 was a different story: The German economic slump at the beginning of 2009 was significantly higher than in the EU, mainly due to its significant focus on exports (see Table 1 on the left).

The fact that Germany is currently coming through the economic crisis somewhat better than other European countries is probably mainly because the restrictions on public life in Germany were less severe than in France, Italy, or Spain.

Above-average economic slump in Southern Europe

In Spain, Portugal, and Italy, GDP losses are much higher. The percentage change that real GDP shrank in these three countries is greater than the EU average in both the first and second quarters (see Table 2).

The reason for the severe economic slump in these three countries is, in addition to the above-average measures to contain the corona pandemic, is the high dependence of these economies on tourism because there are still considerable restrictions on travel – leading to a negative impact on growth and employment.

After all, by the end of June, we had already shown that companies’ expectations were improving and that there were initial indications of an economic upturn. These indications have proven true, and more signs exist that point to a recovery of the economy.

Surprisingly strong GDP growth in China in Q2

In China, the corona pandemic broke out at the end of 2019. As a result, government measures to contain the infection took place earlier than in Europe. Accordingly, the most severe economic slump in China occurred in the first quarter of 2020. After a 10 percent decline in real GDP, the Chinese economy recovered in the second quarter and grew by more than 11 percent (see Fig. 2). In addition, China’s exports rose surprisingly strong in July 2020.

The Chinese recession has thus already bottomed out. Growth in the world’s second-largest economy has had a positive effect on Europe’s economy: If income and production in China continue to grow, Chinese demand for consumer and capital goods from Europe will increase.

Strong increase in disposable income in the USA in the 2nd quarter

Extrapolating US GDP from Q2 2020 to a twelve-month period would result in a GDP decline of 32.9 percent. However, if we solely look at the figures for just that quarter, we can observe less frightening figures of below ten percent.

Besides these intriguing numbers, there are also economic bright spots in the world’s largest economy. Recently, for example, the unemployment rate has fallen while business expectations have risen sharply at the same time (Fig. 3).

The sharp rise in disposable income is also astonishing. The government’s measures to counteract the most severe hardships of the crisis have resulted in disposable income rising by 1.5 trillion dollars (+42.1 percent!) in Q2 2020, and savings have grown even more dramatically. This is an important factor as it could help to avoid large defaults on the credit markets. However, talks about new COVID-19 stimulus packages are currently at a standstill. Such political disagreement can be a drawback to the recovery.

What will economic impact of coronavirus look like?

The economic data suggest that the bottom of the corona-related economic crisis in Europe was reached in the second quarter of 2020. Production and income should rise again in the second half of the year. There are also glimmers of hope in other major economies such as China and the USA.

This could further fuel a possible upswing. However, this hope is only valid if there is no new comprehensive lockdown in large parts of Europe and other parts of the world in the coming months. Should such measures become necessary due to rising infection rates, this would lead to a renewed economic downturn.