With many countries, including Australia, having reported their national accounts for the April to June quarter, the initial economic impact of the coronavirus pandemic is now a matter of record — with the emphasis on ‘initial’.
Although a partial recovery is likely in most countries in the July to September quarter, the economic pain will continue for years even if there are no further lockdowns, as slumps like this have long-lasting effects. With further lockdowns, it will be much worse.
The national accounts provide further quantification — if any was needed — of the enormity of the economic toll from the pandemic, its health impact and the associated restrictions on economic and social activity. They also give added force to doubts about the need for, and effectiveness of, those restrictions and the balance between economic and health considerations implicit in them.
As the virus started to affect economies in the first quarter, it is more instructive to look at the first half of 2020 as a whole than just the second quarter. This is done in the chart below, which shows the cumulative movement in real GDP in the first two quarters of the year — in other words, the change from the last quarter of 2019 to the second quarter of this year, which as the chart shows was negative for all countries but one.
Even then, it is misleading to say the coronavirus impact took two quarters to be felt in full. The very few countries that produce monthly national accounts show it actually took just two months, from February to April. In Britian, the contraction in those two months was an astonishing 25.6 per cent, and in Canada it was 18.2 per cent. Then in May and June, about a third of the UK’s contraction and half Canada’s were reversed as their economies partially re-opened. We would likely see the same pattern in other countries, including Australia, if monthly national accounts were available.
Sticking to the quarterly figures, the chart shows a huge range of outcomes from China’s plus 0.3 per cent to Peru’s staggering contraction of 31.2 per cent in six months. China is an outlier because its economic slump and recovery started about two months earlier than in other countries. In China’s case, the first quarter’s change on its own is a more meaningful measure of the coronavirus slump — and that was minus 10 per cent.
Australia’s 7.3 per cent first-half contraction puts us in a relatively favourable light, even though it was by far the sharpest decline in the 60-year history of quarterly national accounts, and in all likelihood — were the data available — the sharpest since the 1930s. Across all OECD countries, the average decline in the first half was 11.4 per cent.
Clearly, every country has paid a huge economic price — and we can say that without even looking at the impact on the labour market. But some have paid a much bigger price than others. Many factors would account for this: the degree of vulnerability to the virus; quality of health care; social customs; economic structure; extent of fiscal and monetary stimulus and support; degree of openness to the rest of the world; composition of major trading partners; and the nature and stringency of government-imposed restrictions on economic and social activity.
The chart superimposes a measure of the stringency of government-imposed restrictions and shows a rough correlation between greater stringency and larger declines in GDP. As anyone who has ever studied statistics has had drummed into them, correlation does not necessarily imply causation. However, even though there would be an economic contraction without government-imposed restrictions, they do have an additional effect. The question must be asked: is the economic and social cost they have imposed worth the benefits achieved? And it is a question that should weigh heavily on the mind of Victoria’s Premier Dan Andrews.
The cost is clear and the benefits are increasingly being questioned, such as in The Failed Experiment of COVID Lockdowns, which cites evidence that the virus marches to its own drum and that community-wide lockdowns have little effect on it while exacting a huge economic and social cost.
Peru’s experience is consistent with this view: it has had the most stringent restrictions and the largest economic contraction, but still has the highest number of COVID-attributed deaths per capita. Arguing along these lines in the Weekend Australian, Terry McCrann concluded: “we are living through the greatest public policy failure in this country’s entire history”.
If we have to live with restrictions for a while longer, they should be better targeted at specific high-risk situations; such as nursing homes and large indoor gatherings. One of the most compelling facts of relevance is that almost 70 per cent of all the deaths attributed to COVID-19 in Australia so far occurred in aged care institutions in Victoria, and 95 per cent of all the deaths were of people aged over 70.
This must at least call into question the need for — and effectiveness of — community-wide shutdowns.
Robert Carling is a Senior Fellow at the Centre for Independent Studies.
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