Ryan Greenaway-McGrevy looks at the impact of COVID-19 and various policy responses on business activity across a range of countries

Ryan Greenaway-McGrevy looks at the impact of COVID-19 and various policy responses on business activity across a range of countries

Today's Top 5 is a guest post from Ryan Greenaway-McGrevy, senior lecturer in economics at the University of Auckland.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

Auckland Chamber of Commerce Chief Executive Michael Barnett reacted to our return to level 3 in Auckland by stating that extending the lockdown beyond three days would be a “disaster for business” – implying that business would be better served if it were permitted to stay open. But consumer confidence matters, and we should not expect household discretionary spending to continue at pre-pandemic levels in a world in which COVID-19 is prevalent in the community.

Going back to business-as-usual is not possible in the immediate post-pandemic world, and policy options are about minimising the fallout from the virus. We are now eight months into the global pandemic, which affords us the opportunity to take a look at economic data at home and abroad in order to gain an impression of the impact of the virus and various policy responses on business activity.

1) New Zealand.

Whereas the US and the EU produce preliminary estimates of GDP one month after the close of the quarter, here in New Zealand we must wait about two and a half months before an estimate of GDP is released. Statistics New Zealand will announce its first estimate of Q2 GDP growth on September 17. Until then we must rely on other sources.

Massey University’s GDP Live nowcast is estimating a 16% quarter-on-quarter decrease in nominal GDP for Quarter 2. That is a significant decline when compared to the EU or the US, but it makes sense given that the level 4 lockdown spanned much of the quarter. And, of course, our COVID mortality rate is far below that of the US and many European countries.

Once the official GDP estimate comes out in September we will begin to grasp the global impact of COVID on our exports, and how the lockdown affected household consumption. Unfortunately it won’t be able to tell us about the effect of the loss of international tourism on the economy, as this requires a separate satellite account to distinguish between the spending of residents and international tourists.

2) United States.

The haphazard US approach to the pandemic has dominated global media, with various States yo-yo-ing between lockdown, containment and reopening strategies. On a per capita basis, COVID mortalities are among the highest in the world, but still remain below that of Sweden, for example, which has also received significant media attention for its less stringent approach to the pandemic.

Real GDP fell by 33% at an annualized rate in Quarter 2, which is equivalent to about a 7.4% decline over the quarter. Nowcasting models indicate that a rebound is underway in the US. The New York Fed’s nowcast for Quarter 3 growth is 14.6%, which is equivalent to 3.5% quarter-on-quarter. The Atlanta Fed and St Louis Fed Nowcasts are more optimistic, calling for 25.6% and 23.4% growth (annualized).

Nonetheless, these figures imply that the rebound in the US is only partial. Work by the team led by Raj Chetty at www.tracktherecovery.org helps us understand why. Consumer spending is down by about 4.4% relative to pre-pandemic levels, and household consumption represents 70% of the US economy. That may not seem too bad, but a lot of household consumption does not support jobs: On average we spend between 20% and 35% of income on housing services, which perhaps keeps a few professional landlords in paid employment. Drilling down, we see that spending in sectors that do support a lot of low wage jobs has been hit hard. Spending on entertainment, travel and restaurants is down between 25% to 50%. Retail is doing OK, but I suspect much of this has shifted online, supporting jobs in warehouses and logistics at the expense of shop-front workers.

These patterns illustrate that re-opening does not mean a return to business-as-usual when the risk of community transmission is not negligible.

3) Sweden.

Well-known for taking a relaxed approach to the pandemic that eschewed severe restrictions, Sweden has nonetheless felt the economic impact of COVID-19. Early estimates indicate that Swedish GDP declined by 8.6% in Quarter 2. Much of this could be due to falling demand for Sweden’s exports, which make up close to 50% of their economy. Sweden will release its next estimate for Quarter 2 on 28 August, and this should provide further insight into the impact of household consumption and exports on economic activity.

4) Taiwan.

ACT leader David Seymour reckons we can and should implement a less severe containment strategy that follows the Taiwanese model. Unlike Sweden, Taiwan has managed to stay open while maintaining an exceptionally low mortality rate. While New Zealand has since adopted some of the more easily-implemented Taiwanese policies, such as mandating masks on public transport, a constructive and balanced discussion about whether we have the health and information infrastructure to emulate the entirety of their approach would be a welcome contribution to the public debate. That debate should include health professionals working on the front lines of the pandemic response.

In terms of economic activity Taiwan has also done remarkably well. Real GDP fell by only 5.48% at an annualized rate in Quarter 2. That is equivalent to a 1.38% decrease over the quarter. The country reacted swiftly to the pandemic, closing their border in January, and has not imposed lockdowns. That swift action appears to have paid off, although Taiwanese economists I have contacted still perceive a decline in discretionary spending due to concerns about COVID in the community. That view is consistent with expenditure-side decompositions of GDP, which reveal an approximate 10% annualized fall in private consumption expenditures. Consumer confidence matters.

5) European Union.

Preliminary estimates by Eurostat show that GDP declined by 11.9% in Quarter 2. But there is substantial regional heterogeneity underlying the headline figure, with Spain experiencing an 18.1% decrease, while Lithuania experienced only a 5.1% fall.

More timely indicators suggest that the EU economy may have since turned a corner. The IFO institute’s business climate index rose between July and August, indicating that large business leaders in Germany have a more favourable view of business conditions compared to a month ago. Perhaps a rebound is already underway in Europe’s largest economy.

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25 Comments

I am sure there have been tonnes the world has learned from China on how to put down pandemic in the most elegant way.

The Chinese development model will soon be adopted by most in the post covid world.

Thanks for the Friday humour.

Sure, if you want to apply the Social Credit system, mass national ID tracking, and of course, dragging people forcibly from their homes. Apart from those tactics. I agree their action was swift and decisive. Here in systems like AU and NZ, we rely more on the goodwill of the people and collective responsibility, alongside social and political debate. ;-)

Swift and decisive? They farted around for weeks before doing anything.

Hey Xing, when is China going to teach the world how the Covid-19 virus got from their Wuhan lab to all the other countries so quickly. We would all be interested to learn that one.

Much discussion of GDP, but is it measured the same in every country? I note that in the past there have been many critics of GDP as a measure not capturing or reflecting important parts of the economy.

Perhaps it is the living standards of our people which is more important, the 'Wellness' measure? But then that I suggest, has been in decline long before COVID came along.

A "Wellness" indicator would be interesting but it's also pretty subjective. It's also prone to being skewed by the fact a large proportion of our population is based in Auckland, which I would suggest is a "downside" effector given the stresses and strains of living in such a large metropolitan area. It would also be difficult to compare NZs position relative to the rest of the world definitively.

How is it skewed though, isn't that just a representation of how a large chunk Kiwis live?

Does the 'Wellness' measure actually measure living standards though? I would guess that there would be some variability from centre to centre. Some in small towns, in some aspects could be seen to be better off than comparable people in a big city for example.

Is GDP measured the same in every country? Short answer: Yes. Long answer: No. National statistical offices have different funding levels that impacts the quality of the data and their survey programs.

The basic economic aggregates (measures of economic activity, (un)employment, household income) are a first order approximation of living standards (at least in the short run). Countries with lower economic activity have lower life expectancy, higher child mortality, lower levels of education etc. Prolonged unemployment represents a substantial reduction in living standards for affected households. Moreover, these aggregates are a leading indicator: a prolonged reduction in GDP of the magnitude expected by the Nowcast will negatively impact people's lives.

So Sweden's economic decline is much less than most. Also it's exports have been whacked but it's domestic economy has been humming along quite well.

Sweden’s GDP fell 8.6% during the second quarter of the year, according to its statistics body.

The fall is sharper than its neighbours – Denmark registered a 7.4% fall, and Finland a 3.2% fall. Statistics suggest Norway also fared better than Sweden.

Sweden decided not to pursue a nationwide lockdown, unlike most European nation. The statistics show this did not help its economy. https://www.businessinsider.com.au/coronavirus-sweden-gdp-falls-8pc-in-q...

I notice it didn't include any GDP stats from any other "non-nordic" countries who used the nationwide lockdown method. https://ec.europa.eu/eurostat/documents/2995521/11156775/2-31072020-BP-E...

Well Sweden has the strongest export economy, so their overall economy was disproportionately affected by a drop away in exports which is affected regardless of lockdown or no lock down.It would be interesting to see data on their domestic economy, that would look quite good.

On the other hand tourism is only a small part of Sweden's economy - countries (like Spain) where tourism is huge are more economically affected.

If Sweden has an export economy, then that would obviously be affected by their customers' Covid affected importing. So their economy would go down because of other people's Covid, not their own.

Their GDP data were released overnight. Commentary from Statistics Sweden indicate that Sweden's domestic economy has also been whacked:

"Household final consumption decreased by 7.7 percent. This decrease mainly came from lower household consumption of restaurant and hotel services, as well as lower household consumption abroad."

https://www.scb.se/en/finding-statistics/statistics-by-subject-area/nati...

The few Swedes I know have indicated significantly less spending on entertainment, restaurants and face-to-face retail.

Consumption of what, Ryan?

Do you folk ever count the 'what'?

Yes, although I am unclear to whom you are referring.

You can find a detailed breakdown of household consumption here: https://www.scb.se/en/finding-statistics/statistics-by-subject-area/nati...

It's exponentially-increasing consumption of processed parts of the planets that I'm on about. Using a finite energy-source at exponentially-increasing rates too.

And it's economists - taught by folk like you - to whom I'm referring.

here we are Ryan:
https://www.resilience.org/stories/2020-08-28/preparing-for-the-end-of-t...

"Prádanos argues that it is unwise to approach education in a way that presumes the continuity of our existing system, because the continuation of that system will ultimately cause us to exceed the limits of the planet. Instead, he suggests, “education would better serve students in particular and all humans in general if our teaching and research methods stop perpetuating the cultural paradigm that brought us to the brink of extinction and start encouraging students to imagine and create alternatives to it.”

Does that cause any conscience-qualms?

Auckland University Applied Research in Economics seeks to improve NZers’ prosperity and welfare

Doctor Ryan
Your article starts off referring to the non-availability or lack of timeliness of critical data in NZ
Quote: "NZ must wait 2½ months before an "estimate" of GDP is released. Stats NZ will announce its first "estimate" of Q2 GDP growth on September 17. Until then we must rely on other sources". nb: the emphasis on estimates. Prior to joining the University of Auckland Dr Ryan was a Research Economist in the Office of the Chief Statistician at the Bureau of Economic Analysis (BEA) in Washington, DC. In your opinion is the product out of NZstats fit-for-purpose and does it meet your needs

The link to Sweden's breakdown of consumption is presented in XLSX files. I don't have software to open those files, so unable to digest and assess the significance of the data and thus the point you are making. What would be more valuable is the equivalent information for NZ

Where we need to go is the stock of resources available to NZ and the annual rate of depletion or consumption. Are we sustainable? Business wise is NZ business meeting those needs or is NZ importing its consumption. How much consumption does NZ import. Which should then lead to an evaluation of the consumption per head of population and the marginal effect of mass immigration in NZ on imported consumption

That's not that bad compared to many countries. My brother works in hospo there and he says it's been OK, obviously down, but OK.

'Lower household consumption abroad' doesn't impact the local economy, in fact it can support it. It seems this data relates to household consumption in total rather than household consumption in the domestic economy per se.

Unless and until debt is allowed by the authorities in all countries, to impact through on defaults and credit impacts, the proper expected and normal effect of this whole mess cannot be cleared.
Big question is: how long can subsidies to wages, QE and mortgage deferral sustain spending enough to keep economy afloat? Until a vaccine is widespread? Seems unlikely given that vaccine in wide usage and distribution is not probable until around May 21 or later. So, as sugar rush of authority spending (gov and CB) wears off, the reality of Cv19 true impact, will appear. My best guess is hits in late January in NZ and elsewhere, with summer being the big clincher re truly seen impacts. Til then, its extend and pretend