President Donald Trump’s push to reopen the United States quickly this spring may have saved some short-term economic damage. But indicators both at home and from around the globe suggest that until the U.S. gets its coronavirus outbreak under control, its medium- and long-term economic prospects remain dicey.
As governments release their final figures for the second quarter of the year, it’s become clear that, more than anything else, a country’s success or failure combating the pandemic is what is driving economic performance.
Lockdown measures have taken a toll, which helps explain why parts of Europe and Asia performed far worse than the United States earlier this year. But the approach to reopening, including governments’ willingness to embrace measures like mask mandates, are more predictive of a country’s economic trajectory — whether that be a v-shape, swoosh, bird wing, or one of the many other monikers economists have come up with to describe the course of a recovery after a plunge in output.
The variation in countries’ second quarter GDP numbers — which cover the period between April 1 and June 30 — offer an illustration of how dependent national economies now are on the state of their public’s health. While doubts exist about China’s pandemic death toll and economic statistics, there’s no dispute that the country that was home to the original coronavirus outbreak is already back to growth.
That’s thanks in part to the harsh regional lockdown in Wuhan, where the virus originated, quarantine systems that isolated victims from their families and co-workers, and mask mandates (now lifted) in at-risk cities like Beijing.
Every member of the G-7, meanwhile, is now in a deep recession, ranging from Japan’s 7.6 percent contraction in Q2, compared to the previous quarter, to Britain’s 20.1 percent contraction since Q1. The U.S. is about average among the seven countries, contracting by 9.5 percent in the same period compared with the first quarter of 2020.
India just reported the world’s worst recession: losing around a quarter of its output after implementing the world’s biggest lockdown. The Modi government’s severe measures bought valuable time to fortify its fragile health system, allowing the country to maintain a lower death rate than the United States. But India’s reported cases have doubled from around two million to four million over the past month, as it’s struggled to keep its population socially distant. And the country is now on track to overtake the U.S. in total reported cases, just ahead of the November election.
A Goldman Sachs report underscores the direct link between public health and the economy. The June 29 report estimates that a national face mask mandate in the United States “could potentially substitute for renewed lockdowns that would otherwise subtract nearly 5 percent from GDP.” Trump has rejected such a mandate, but Democratic presidential candidate Joe Biden has said he is open to the idea, if health officials recommend it.
Jan Hatzius, a Goldman Sachs analyst who co-authored the report, told POLITICO that U.S. economic results since July bear out the relationship between health and growth. The economy’s improvement, he noted, corresponds to a rising share of the American population subject to state and local mask mandates — from about 40 percent in June to its current 80 percent.
East Asian economies where mask-wearing is a national norm, such as China, Japan and South Korea, have avoided the worst recessions, as have countries like Vietnam and Singapore, which instituted mask mandates early on in the pandemic. Like China, Vietnam is now posting positive economic growth.
After becoming the first coronavirus epicenter outside of China, Italy used a mask mandate to help beat dire second quarter GDP predictions, vastly outperforming the United Kingdom, which resisted mask rules for months.
Masks are not the only medicine: Germany’s rigorous testing and well-prepared health system put its health and economic outcomes consistently ahead of both its large neighbors and the U.S.
Recession before recovery
While national economies are likely to have hit rock bottom back in April, countries that have failed to contain the virus, such as the U.S., are on the path to prolonged recession, rather than recovery.
Under the Trump administration, the country started locking down in mid-March — and many states did not do so until April — well behind hard-hit European countries. And the U.S. opened up sooner. That helped achieve better economic numbers in the second quarter than much of Europe, but it also didn’t snuff out the virus.
Unable or unwilling to close state borders, the coronavirus has ricocheted around the U.S., in contrast to EU countries which closed their internal borders for months. Covid-19 case levels have plateaued at a much higher in the U.S. than in other rich countries, and public health officials fear the onset of flu season and cooler weather will cause another spike.
Modeling by the University of Washington’s Institute for Health Metrics and Evaluation projects American Covid-19 deaths to be around 408,000 by Dec. 31 if current policies are maintained, rising to 608,000 if current pandemic restrictions are eased. If a national mask mandate were in place, the death toll could be limited to 286,000.
“In the COVID recession, economic conditions are too closely tied to the pandemic’s trajectory to be able to forecast with confidence the course of recovery,” writes Stanford University’s Michael J. Boskin.
Economists now warn that instead of the “v-shaped” recovery President Donald Trump has been promising — a reference to an economic bounce to match the dip of spring 2020 — it now risks a “double-dip” recession without renewed economic aid.
In the U.S., 80 percent of 235 economists surveyed by the National Association of Business Economics in August see a 1-in-4 chance of such a recession, where the economy would retrench again, as it did in the spring, rather than keep recovering.
The warning signs include mounting bankruptcies as a flood of U.S. government support from April to July turns into a trickle, and the likelihood that falling temperatures will dent outdoor dining and other tourism-related spending.
U.S unemployment numbers are another cause of concern. On Wednesday, United Airlines and Ford announced tens of thousands of layoffs, and the World Travel and Tourism Council estimated just over 12 million out of 16.8 million tourism-related jobs in the U.S. are at risk of being lost in a “worst case” scenario in coming months. The U.S. Travel Association puts the number at 8 million.
While 10.5 million jobs have been created since the beginning of June, bringing the official unemployment rate down to 8.4 percent, claims for a new pandemic unemployment assistance program designed for freelance and gig workers are rising: 760,000 claims last week, up from 607,806 claims the previous week. Overall, more than 29.2 million American workers are now receiving unemployment insurance benefits.
One way to illustrate the depth of the economic shock facing the U.S. is to compare jobless numbers here with the 19-strong collection of Eurozone countries, which has a nearly identical population to the U.S. More than 35 million Americans made unemployment claims between April and June, compared to just 4.5 million in the Eurozone, according to the EU statistics agency Eurostat.
One of the reasons European companies were able to keep a lid on unemployment: They kept up to 45 million workers on paid furlough schemes, according to a European Trade Union Confederation (ETUC) estimate.
That policy would suggest European governments are racking up more pandemic-related debt than the U.S., but their overall stimulus packages are of a similar size, and European government debt levels are lower, on average.
The U.S. government budget deficit is also projected to triple this year to $3.3 trillion, soaring to the largest percentage of gross domestic product since 1945, per Congressional Budget Office calculations. As a result, federal debt will exceed 100 percent of GDP by the end of 2020. Just seven of the European Union’s 27 member countries have debt levels above 100 percent of GDP.
Trump, however, continues to deflect responsibility for the country’s economic straits, and tout things like the country’s stock market performance to suggest the economy is bouncing back. Contrast that response with the government in Australia, which announced Wednesday that the country had entered its first recession in 29 years. While Australia’s recession is smaller than America’s, Prime Minister Scott Morrison told Parliament “this is a devastating day for Australia.”
Elsewhere, Japan’s prime minister Shinzo Abe resigned last week: officially for health reasons, but also dragged down by a 32 percent approval rating. While Japan’s economy is doing the best of the G-7, and has a far lower unemployment rate than the U.S., it’s still the country’s worst recession on record, and leaves Japan with worse economic and health outcomes than regional rivals China, South Korea and Taiwan.
An unwanted global leader
While China’s global economic influence is growing, the United States economy remains the world’s largest, and its health has the ability to lift up or drag down other national economies.
With the U.S. unable to harness its famous innovation and labor market flexibility to quickly bounce back to growth as it did after the 2008 financial crisis, the International Monetary Fund (IMF) warns the global recovery “is projected to be more gradual than previously forecast,” and bankruptcy rates could triple to 12 percent in 2020 from an average of 4 percent of small and medium enterprises before the pandemic.
The IMF and organizations such as the Organization for Economic Cooperation and Development (OECD) have been revising their GDP projections downward for all G-7 economies since January 2020. Most economies are only expected to get back to their pre-Covid-19 levels by late 2022, assuming a vaccine becomes widely available in 2021.
Other positive forecasts may be offering false hope. The IMF projects an impressive-looking growth rate for 2021 — 4.5 percent for the U.S. and 5.4 percent globally — but achieving even that would still leave the global economy 6.5 percent smaller in December 2021 than in January 2020 when the virus hit.
“The recovery will peter out, even if we don’t tip into another outright recession because of unemployment,” said Albert Edwards, a global strategist at French banking giant Société Générale who became famous for foreseeing the 2008 global financial crisis. “It will certainly feel like a depression,” he said.