Macro insights

Calibrating the coronavirus shock

Economic activity has been brought to a hard stop globally due to the measures taken to contain the coronavirus outbreak. Based on the strictness of the lockdown measures and the resulting loss of mobility – as well as analysis of sector specific measures – we gauge the overall economic impact of the coronavirus shock in the major developed market (DM) countries. Our analysis shows that the initial shock is greater in the euro area – but the knock-on effect could be worse for the U.S.

Sources: BlackRock Investment Institute, Oxford University, Apple and Google, with data from  Haver Analytics. Notes: We considered a set of sectors likely to be hit the hardest – such as retailers, hotels, and restaurants – and came to an assessment of how severely each has been impacted. This is similar to scenarios published by the OECD, the INSEE, the NIESR and the Ifo Institute. Our calculations take into account that in some countries – such as France, Italy and Spain – the lockdown has been more severe than in others. For this we use the University of Oxford’s Stringency index and mobility data from Apple and Google. The loss in output depends on the severity of the lockdown and the role of the affected sectors in the wider economy. We use these estimates of peak-to-trough output decline to get a first approximation of the impact on the average GDP growth in 2020. This analysis is subject to limitations – it does not take into account stimulus measures, and it remains uncertain how quickly different economies will reopen.

The calibration of the initial shock to GDP is driven by two main factors: the strictness of the lockdown measures and the corresponding reduction in mobility, as well as the role of the affected sectors in the economy.

As the initial shock ripples across the whole economy, the knock-on effects cause the negative impact of the lockdown to build up as the initial income loss weighs on demand for other goods and services, magnifying the initial drop in output. The size of this so-called multiplier effect is larger if the share of imported goods and services is smaller, the national saving rate is lower and the government’s tax intake is smaller as a share of GDP.

Comparing the orange and yellow bars in the chart above shows that the euro area is initially more severely impacted than the U.S. Yet the U.S. economy is likely to see a more pronounced knock-on effect. This is because it has a greater share of income being spent rather than saved or taxed, and because a larger share of that spending is on domestically produced goods and services.

We can use these estimates of peak-to-trough output decline to get a first approximation of the impact on the average GDP growth in 2020 (see green bars in the chart above). This allows us to get an idea of the ball-park range of the economic damage from coronavirus containment measures. The calibrations should be taken with a pinch of salt because the pace of reopening in different economies remains uncertain.

Our analysis does not account for the massive policy stimulus that has been rolled out globally over the past few weeks. As economies gradually normalize in the second half of the year, this policy stimulus becomes increasingly important for the shape of the recovery.

Easing of social distancing rules in the coming weeks will likely facilitate a rebound in activity in Q3 2020. This partial rebound should not be mistaken for a V-shaped recovery. Even without a deterioration in potential output and without an escalation into a full-blown financial crisis, it may take several years for nominal GDP to return to its pre-crisis trend. A substantial permanent loss in income could remain. Yet this permanent loss in income should be considerably lower than that seen in the wake of the global financial crisis.