How do heads of different countries interact?

Corona effects in an international comparison

In the OECD countries, production fell sharply almost everywhere during the Corona crisis, in the 2nd quarter by around 10% after having already decreased by 2% in the 1st quarter. However, the extent of the break-in differs significantly between the countries (see Figure 1). Macroeconomic activity declined particularly sharply in Great Britain and Spain, where gross domestic product (GDP) slumped by almost 23%, as well as Italy and France. The decline was comparatively moderate, especially in some OECD countries in Asia such as South Korea and Taiwan, where the spread of the coronavirus was combated comparatively early and in a targeted manner.

illustration 1
GDP development in selected OECD countries in the first half of 2020

Notes: price and seasonally adjusted, change in level in the 2nd quarter of 2020 compared to the 4th quarter of 2019 in%; Q1 and Q2: Contributions of the respective quarters.

Sources: national statistical offices; OECD Main Economic Indicators.

A characteristic of the Corona crisis is that private consumption - a component that is usually relatively stable in the economic cycle - was restricted more than GDP in most countries. Most of the time, a decrease of more than 10% was recorded, in Great Britain and Spain even by almost 25%. Investment also fell significantly in most countries, but generally not more than private consumption. Both imports and exports fell drastically, especially in those countries that, such as Spain, Italy and France, generate a high proportion of the added value through international tourism, as service exports have ceased on a large scale. Government consumption remained relatively stable in most countries. In Great Britain and France, however, it has fallen massively, which is probably also due to statistical effects.

With regard to the extent to which the economic sectors are affected, the corona crisis differs significantly from previous economic crises. Production in the manufacturing sector, which usually shapes economic dynamism, contracted sharply in most OECD countries during this crisis as well. What is unusual, however, is the slump in personal services, which otherwise tend to have a stabilizing effect on the economic cycle. These include trade, transport and hospitality, as well as other services (including art, entertainment and recreation) (see Figure 2). The differences between the countries in the development of the construction industry are particularly large. For example, construction activity came to an almost complete standstill in some countries during the shutdown (for example in France and Spain), but in other countries (such as Germany) it hardly continued to slow down.

Figure 2
GDP development in OECD countries in the first half of 2020 by economic sector

Notes: price and seasonally adjusted, percentage change in the level in the 2nd quarter of 2020 compared to the 4th quarter of 2019; the diamond shows the average, the black bars the minimum and maximum from eleven OECD countries.

Sources: national statistical offices; OECD Main Economic Indicators.

Various factors can be used to explain the differences in production development between countries. These include the occurrence of infections, government restrictions on economic activity and structural factors such as the degree of economic openness or the importance of the economic sectors particularly affected by the pandemic. In the following, correlations of the decline in GDP with indicators for the factors mentioned are considered for 33 countries, including both advanced economies and emerging economies (see Table 1). There is no significant correlation between the infection rate and the decline in GDP. A stronger correlation can be found for the number of deaths per inhabitant. The governments have reacted to the spread of the coronavirus with numerous measures that should reduce social interaction and thus break the wave of infections. The extent of the regulations differs from country to country in terms of when they are introduced, the severity of the measures and the duration of their effectiveness. A statistical correlation between the state reaction and the depth of the economic slump can be shown with the help of an index of the severity of the measures (Stringency Index) developed at Oxford University (see Figure 3).

Figure 3
Relationship between economic activity and lockdown rigor

Notes: data for 33 countries. y-axis: change in GDP from 1st quarter 2019 to 2nd quarter 2020. x-axis: lockdown strictness, average in 1st half of 2020, higher values ​​= stricter measures.

Sources: OECD Main Economic Indicators; German Bundesbank; Oxford Covid-19 Government Response Tracker.

A structural factor that could influence the cyclical effects is the relative importance of foreign trade for value added. Because exports and imports typically fluctuate more strongly in the business cycle than the domestic components, and world trade has also collapsed in the current crisis. However, there is no connection between a country's degree of openness and the rate of change in GDP. It also fits that the value added share of the manufacturing industry does not make a significant contribution to explaining the international differences in the strength of the downturn, but even correlates slightly positively with economic activity. On the other hand, a higher proportion of trade, transport and hospitality plus other services (including art, entertainment and recreation), the activity of which suffers from social distancing to a particularly high degree and particularly persistently, is significantly associated with a stronger decline in GDP. The value added share of the tourism sector, as reported by the World Travel & Tourism Council, provides a similarly large explanatory contribution.

Table 1
Relationship between selected indicators and economic activity in the first half of the year
Indicator (independent variable)Correlation coefficient
Covid-19 infections-0,01
Covid-19 deaths-0,37 (**)
Shutdown severity-0,45 (***)
openness0,11
Personal services-0,44 (***)
Manufacturing0,29 (*)
tourism0,49 (***)

Notes: data for 33 countries. Correlation with the change in GDP from Q1 2019 to Q2 2020. *, **, ***: significance level of 1%, 5% and 10%, respectively. Infections and deaths: cumulative, per 1 million inhabitants, as of June 30, 2020; Shutdown severity: index, average in the 1st half of 2020, higher values ​​= stricter measures; Openness: Sum of exports and imports in relation to economic output; Personal services: added value shares in the areas of transport, trade, hospitality and other services; Manufacturing industry: Share of manufacturing industry in gross value added; Tourism: total contribution to added value according to the World Travel and Tourism Council.

Sources: OECD Main Economic Indicators; German Bundesbank; ECDC; IMF International Financial Statistics; Oxford Covid-19 Government Response Tracker; World Travel and Tourism Council.

 

This article is a shortened and revised version of the section "Focus: Pandemic events and macroeconomic development in international comparison" in the report of the joint diagnosis from autumn 2020, which was prepared with the collaboration of Christian Grimme (ifo Munich), Geraldine Dany-Knedlik (DIW Berlin), Axel Lindner (IWH Halle) and Klaus Weyerstrass (IHS Vienna).

Klaus-Jürgen Gern, Philipp Hauber
[email protected]