What Q1 Results Tell Us About the Outlook for the Economy

As expected, the world economy is beginning to feel some of the effects of the Covid-19 pandemic as a number of major economies have released their preliminary GDP growth results for the first quarter of this year.  For most countries, the first quarter will not be the peak of the first wave of this pandemic, but nevertheless, we can already see just how great the downwards pressure is on the global economy from the first quarter results that have been released so far.  In fact, while the first quarter results are a sobering reminder of how badly the global economy has been impacted by this pandemic, the second quarter results are almost certain to be much worse for most of the world’s largest economies.  This highlights the desperate need of governments and businesses around the world to formulate a strategy that will not only mitigate the health impact of the Covid-19 pandemic, but will also allow for the economy to get back on its feet, a balancing act that will be crucial to our ability to recover from this crisis.

So far, the first quarter GDP numbers that have been released have been generally in line with expectations.  The first results came from Asia, and while the Chinese economy took a beating in the first quarter, many other Asian countries reported slightly better-than-expected GDP growth results for that period.  Later, it was the United States’ turn to release its preliminary GDP growth results and these were perhaps a little worse than expected, although the soaring unemployment numbers in the US were a clue as to the severity of the impact of the pandemic on the world’s largest economy.  Finally, the European Union and number of Europe’s largest individual economies released their first quarter GDP growth results and, as had been anticipated, these were among the worst of the bunch, with sharp declines in output across that region.  Overall, it appears that the global economy will have contracted by around 3% year-on-year in the first quarter of this year, with a much larger contraction forecast for the second quarter.

China Was Hit First

As the Covid-19 pandemic emerged from China and impacted that country’s economy before any other, it was no surprise that the Chinese economy shrank by a larger amount in the first quarter than any other large economy that has so far released results for that period.  In the first quarter of this year, the Chinese economy shrank by 6.8% on a year-on-year basis.  As a reminder, the Chinese economy has been slowing for much of the past decade, with growth in 2019 slowing to 6.1% (its lowest level since 1990), as the trade war with the United States had a major impact on many industries in China.  In the first quarter of this year, a “phase one” trade deal with the US was reached, but immediately thereafter, the Covid-19 outbreak resulted in huge disruptions to the Chinese economy, with manufacturing declining and with consumer and business spending falling dramatically.  

As we look to the second quarter, a recovery in China is expected to get underway, but the economy is likely to stagnate, and perhaps even decline during this quarter, although at a much lower rate than in the first quarter.  For the year in 2020, we are forecasting growth of 1.3% in China, a result that would be the country’s worst since the 1970s, but one that would be much better than those forecast for most other large economies this year.

The United States Ten-Year Run of Growth is Over

The Covid-19 virus first arrived in the United States in mid-January, and the initial impacts to the US economy were largely felt on the supply chains of US manufacturers with suppliers in Wuhan and other areas of China.  However, as the outbreak reached New York City, it exploded, shutting down the world’s largest economic center and eventually led to huge disruptions spreading across the US economy in the following weeks. As a result, the US economy shrank by 4.8% on an annualized basis in the first quarter (it did manage to record 0.3% growth on a year-on-year basis), a slightly worse result than had been expected.  Much of this slowdown was the result of a dramatic decline in consumer spending, which fell by its largest amount in 40 years in the first quarter.  

Now, with lockdown measures in place across much of the US, and with more than 30 million people in the US out of a job, the second quarter appears set for a massive decline in economic output in the United States, with the world’s largest economy likely to contract by more than 30% on an annualized basis (or nearly -8% year-on-year) during that period.  So far, we expect a tentative recovery in the US in the second half of this year, but this will not prevent the US economy from shrinking by a little more than 5% for the year in 2020.

Europe Will Suffer the Greatest Economic Losses

While this pandemic started in China, much of its spread around the world was the result of a hotspot in northern Italy and the Alps that developed in late February.  This resulted in areas such as Italy’s Lombardy and Spain’s Madrid region going on lockdown in early March, followed by much of the rest of Europe in the following weeks.  As expected, this had a major impact on the European economy, as the region’s trade-dependent economies found themselves facing closed borders and plummeting export demand.  

These factors played a major role in the extremely-poor economic results for the first quarter that have been released so far in Europe.  For example, the European Union as a whole saw its economic output decline by 2.7% on a year-on-year basis, while the Eurozone’s economy shrank by 3.3% year-on-year.  For those individual European economies that have released their first quarter GDP growth results, the figures are even more alarming.  In Spain, GDP declined by 4.1% in the first quarter, while in Italy, the contraction amounted to 4.8%.  Worst of all, so far, the French economy shrank by 5.4% year-on-year in the first quarter, a much-worse figure than had been expected.  

Looking ahead, the second quarter is expected to be even worse for all European economies, with the EU’s economy forecast to shrink by nearly 10% on a year-on-year basis during that period and by more than 7% for the year in 2020.

Other Results Offer Some Hope

While most of the world’s attention has been on the economic performances of China, the United States and Europe during the first quarter of this year, a number of other important economies have also released their first quarter results as well.  

For example, Vietnam’s economy performed better-than-expected in the first quarter of this year, as it expanded by 3.8% on a year-on-year basis.  South Korea’s economy also beat expectations as it grew by 1.3% year-on-year, although weakening export demand is a major concern for that country.  Elsewhere in Asia, Singapore’s economy was hit very hard by the pandemic, with its economy shrinking by 2.2% on a year-on-year basis, and its export-dependent economy is likely to suffer more setbacks in the months ahead.  Outside of the aforementioned regions, Mexico has been the only other major economy to release its first quarter GDP results thus far, and these were not encouraging, as Latin America’s second-largest economy contracted by 1.6% year-on-year during the first three months of 2020. 

Little Chance of a V-Shaped Recovery

Obviously, these poor economic results in the first quarter are a major cause for concern.  Coming into 2020, China and the United States were expected to account for 50% of all of the additional economic output generated around the world this year, but, thanks to the Covid-19 pandemic, both economies are facing their greatest crisis in decades.  As for Europe, 2020 was expected to be a difficult year anyways, with the region forecast to fall into a recession even before the world ever heard of Covid-19.  Now, Europe faces the prospects of a devastating recession, its fourth recession in the past 12 years.  

Unfortunately, even more challenging times await, as the global economy is expected to shrink by a much greater amount during the second quarter.  Worse, hopes for a V-shaped recovery are fading, while even those expecting a U-shaped recovery are growing more concerned as the pandemic threatens to come in waves until a vaccine can be found and distributed worldwide.  In fact, the potential for an L-shaped recovery has risen, particularly for weaker economies that were struggling to generate growth even before the pandemic emerged.  The performances of economies such as Italy and Argentina since the financial crisis could offer clues to what awaits many of the world’s weaker economies in the years ahead.

Glimmers of Hope

While this is a very bleak picture, there still are some reasons for hope for the global economy, and there are lessons that can be learned from this crisis that can make the global economy more resilient to such shocks in the future.  For example, all around the world, businesses, employers, investors and others are being forced to learn new methods and processes, and this may help the global economy to reverse decades of declining productivity growth, one of the main drags on the global economy so far this century.  This could lead to significant improvements in efficiency, as these new processes and methods take hold across country and industry lines.  Meanwhile, the dramatic improvements in the health of the environment that we have seen as a result of the lockdown measures imposed around the world gives us hope that we still have time to take the steps needed to improve the well-being of our planet.  

Finally, there is still hope that the time needed to recover from this economic downturn will be shorter than that for other such downturns in world history, especially given the nature of the causes of this downturn.  Many experts are confident that a vaccine for Covid-19 will be ready and available early next year, a timeframe never before achieved in the face of such a health crisis.  It is important for businesses, consumers and investors to remember that, we have faced serious economic crises before, and, each time, we have found a way to overcome them and to return to growth.  Sometimes the way was difficult, but since the days of the Industrial Revolution, the global economy has always found a way to return to growth, even in the darkest times.

Michael Weidokal is an author and speaker on global economic and geopolitical issues, as well as the Executive Director of ISA (International Strategic Analysis), one of the world's leading global market intelligence and economic forecasting firms.

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