BlackRock Investment Institute

Macro insights

How coronavirus containment
hits growth

The coronavirus pandemic has triggered an abrupt, deliberate stop to economic activity. Initial estimates of GDP growth for Q1 2020 published last week were below consensus across the board. The impact in the euro area was deeper than in the U.S., which went into lockdown later. The growth data suggest that the depth of drop in activity has gone hand in hand with the stringency of the lockdown. See the chart below. Italy is a slight outlier - the economy seems to have fared better than the severe lockdown in the country would have implied.

Q1 quarterly GDP growth estimates and social distancing stringency

Sources: BlackRock Investment Institute and the University of Oxford, with data from Haver Analytics, May 2020. Notes: The chart shows a measure of how strict lockdown measures are in the countries shown, and official Q1 quarter-on-quarter GDP growth estimates. The stringency score is taken from the Oxford COVID-19 Government Response Tracker. This collects publicly available information on 17 indicators of government responses.

Consensus growth expectations point to a further – deeper – drop in output in Q2 2020, even if lockdown measures are gradually lifted in the next few weeks. This would be consistent with the current shock being akin to a large-scale natural disaster that severely disrupts near-term activity. But a recovery in growth should follow once the lockdown measures are eased. The swift and comprehensive policy response that has met the shock should support the recovery too.

We believe it is time to look beyond the depth of the contraction and assess how long it might last. As countries lay out plans to slowly restart, we will get a better sense of how long it might take. Success will not just be about restarting the economy and containing the virus – but how governments balance both objectives.

We remain of the view that the overall shortfall in GDP from this shock will be far smaller than that stemming from the global financial crisis, provided the policy response gets sufficient traction to prevent permanent damage to production capacity. The most pessimistic sell-side analyst predictions suggest that the long-term loss of GDP in the U.S. will be around 20% of 2019 GDP. For the euro area, this shortfall could be larger at around 65%. This reflects the deeper near-term hit to growth. But these numbers are still dwarfed by growth shortfalls after the global financial crisis – in the U.S. 50% of long-term GDP was lost, and in the euro area 130% of long-term GDP was lost.

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