Banque de France Bulletin no. 237: Article 2 Worldwide GDP decline in 2020: the relative impact of health restrictions, the responsiveness of public and private economic agents, and sectoral specialisation

By Chatelais Nicolas

Thematic: Economic research

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The intensity of the pandemic (as measured by the number of people infected with the virus or dying from the disease) explains only a small share of the shock to GDP in the major economies in 2020. Half of the shock can be attributed to the scale of the response of both government authorities in terms of health restrictions and private economic agents. The other half can be explained by sectoral specialisation (mainly tourism, level of technological development), the pre crisis demographic, social and economic situation and the impact of the fiscal stimulus introduced in 2020. In countries where a “managed quarantine” strategy was adopted, with the aim of strictly containing the pandemic rather than “living with it”, the fall in GDP appears to have been less pronounced.

1 GDP declined in 2020 with differences in magnitude across countries

This paper studies the impact of the Covid 19 health crisis on economic growth in 2020 using a very large sample of countries (see Table A in the Appendix) from the Organisation for Economic Co operation and Development (OECD). In order to assess the magnitude of the shock, we calculate the difference between actual GDP growth in 2020 and its forecast by the International Monetary Fund (IMF) in the World Economic Outlook (WEO) of October 2019. Using the difference between actual and forecast growth enables us to take account of the differences in both potential growth and the positioning of countries in the business cycle. Consider the examples of Italy and the Philippines, both of which experienced a decline in GDP of comparable magnitude (–8.9% and –9.3%, respectively, in 2020). However, the Philippines was on a much higher growth trajectory than Italy before the Covid 19 crisis. This was reflected in the October 2019 WEO forecast where the IMF had forecasted a 6.2% rise in GDP in the Philippines in 2020, compared with only 0.5% in Italy. With this correction, we obtain a GDP shock of 15.5 pp in the Philippines, against 9.4 pp in Italy.

The magnitude of the shock to GDP proved to be uneven across countries. Chart 2 shows that South Korea suffered a smaller shock in 2020 than other countries, notably in Europe. In particular, the loss of GDP amounted to 8.1 pp in the euro area in 2020, compared with 5.6 pp in the United States. However, the intensity of the epidemic seems to explain only a very small share of the decline in activity. Thus, according to Chart 2, France, Italy, Spain and Sweden show the same prevalence at the end of 2020 (around 40 cases per thousand inhabitants), but the growth shock observed ranges from –4.4 pp for Sweden to almost –12.7 pp for Spain. In addition, the distribution of GDP losses in 2020 is very wide and essentially linked to the fall in GDP in the second quarter (see Chart 1).

2 The response of public and private agents could explain 50% of the shock to GDP observed in 2020

A multitude of factors explain the loss of GDP in 2020. …

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Banque de France Bulletin no. 237: Worldwide GDP decline in 2020: the relative impact of health restrictions, the responsiveness of public and private economic agents, and sectoral specialisation