The rebound of the global economy is far from complete and countries are still vulnerable, despite a jump in third quarter growth driven by household consumption.
Many economies around the world have recovered from their sharpest contractions in more than a decade, with gross domestic product (GDP) jumping between July and September compared to the preceding quarter.
However we should be careful in interpreting the third quarter growth rates.
The fact that many countries posted double-digit contractions in the second quarter of 2020 sets a very low baseline, meaning almost any bounce back at all would generate a huge growth rate for the third quarter.
Figure 1 below illustrates this point. There are 42 countries in Figure 1, all of which contracted in the second quarter of 2020.
The declines in GDP ranged from 3.2 per cent (South Korea) to 25.2 per cent (India).
All these 42 countries recorded positive growth rates in the third quarter. The increases in GDP ranged from 1.2 per cent (Saudi Arabia) to 21.9 per cent (India).
Figure 1. GDP growth, 2020:Q2 versus 2020:Q3 (per cent)
Of these 42 countries, India, the UK, and Spain experienced the largest second-quarter GDP declines.
GDP in India rebounded strongest by 21 per cent, following a fall of 25.2 per cent in the second quarter, the sharpest drop ever recorded.
Similarly, Spain and the UK rebounded with double-digit growth rates in the third quarter.
The UK, for example, rebounded by 15.5 per cent, following a contraction of almost 20 per cent in the second quarter.
Despite flashy third quarter GDP growth observed in many major countries, their economies are still vulnerable, and the recovery is not complete.
China is not shown in Figure 1, as it was the only major country recording positive growth in the second quarter of 2020, reflecting the earlier onset of the pandemic and subsequent recovery.
China’s quarter-on-quarter growth of quarterly GDP was -10.0 per cent in the first quarter, 11.7 per cent in the second quarter and 2.7 per cent in the third quarter.
Figure 2 below shows how household spending drove economic growth across major economies Australia, Brazil, Canada, France, Germany, India, Indonesia, Italy, Japan, South Africa, Turkey, the United Kingdom, the United States and the European Union.
Figure 2. GDP growth and household spending growth in 2020:Q3
For example, Australia’s economy expanded by 3.3 per cent in the three months to September, led by household spending which rose 7.9 per cent.
The unprecedented fall in Australian household spending (12.5 per cent) in the second quarter was partially reversed in the third quarter, which reflects increased spending with easing of COVID-19 restrictions.
Despite flashy third quarter GDP growth observed in many major countries, their economies are still vulnerable, and the recovery is not complete.
Look at the United States. The GDP rose by 7.4 per cent in the third quarter, a sharp reversal from the second-quarter plunge of 9 per cent.
Figure 3. Real GDP levels, United States (billions)
Billions of chained (2012) dollars. Seasonally adjusted at annual rates. Source: Bureau of Economic Analysis, Accessed 15 December 2020
The White House notes that this growth “follows the most severe pandemic-induced contraction on record in the second quarter of 2020, which occurred as the government mandatorily shut down all but nonessential services, and Americans made sacrifices to slow the pandemic”.
The US economy grew at a record pace in the third quarter, recovering about two-thirds of the ground it lost earlier in the global pandemic.
However, GDP in the US remained below the level of the same quarter a year earlier.
Japan’s economy has rebounded after three consecutive quarters of declining real GDP, as shown in Figure 4.
Figure 4. Real GDP levels, Japan (billions)
Billions of chained (2015) yen, seasonally adjusted. Source: Federal Reserve Bank of St. Louis, Accessed 15 December 2020
The 5.3 per cent growth in the third quarter compared to the preceding quarter signals a recovery for the world’s third-largest economy after the coronavirus pandemic impact.
However, the recovery is moderate because Japan’s GDP shrank by 5.7 per cent in the third quarter over the same period of 2019, while in the second quarter, the year-on-year decline was 10.3 per cent.
Economic activity contracted dramatically on a global scale in the first half of 2020, and while it is clear countries have started to rebound, it will take time to go back to pre-pandemic levels of economic activity.
“investing in policies for people will help shape a better economy for the post-crisis world”.
According to the International Monetary Fund’s World Economic Outlook Update for October, the global economy is projected to shrink by 4.4 per cent this year due to Covid-19, and global growth is projected at 5.2 per cent in 2021.
International Monetary Fund managing director Kristalina Georgieva writes that “investing in policies for people will help shape a better economy for the post-crisis world”.
We are together on this journey. Good luck to all of us.
