May 21, 2020

Lessons learnt from Q1 collapse in global GDP

BY Olivier Desbarres

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( 8 mins)

Global GDP growth, in year-on-year terms, slowed to -2.7% in Q12020  from +3.1% in Q4 2019 and in quarter-on-quarter terms to -4.5% from +0.6% in Q4, based on growth rates in 14 major economies accounting for close to 90% of world GDP.

Global GDP growth in Q1 was at its weakest in over thirty years, at least in quarter-on-quarter terms. By comparison the growth slowdown in 2008 was both less acute and more gradual even if it did gather pace in the second half of the year.

Almost two year’s worth of GDP growth was wiped out in Q1 2020 and the world was very much in recession for the first time since 2009, based on the IMF’s definition.

Global GDP in nominal terms was about $4.5trn lower than it would have been had real GDP growth remain unchanged in Q1 2020 at around 0.7% qoq, according to our estimates. That is a loss equivalent to somewhere between the annual GDP of Germany and Japan.

Among the 14 major economies which have so far released GDP data for Q1 only Chile recorded positive quarter-on-quarter growth.

The economies of Hong Kong and Japan were already in recession in Q1 and the European Union, United Kingdom, Canada and Thailand only narrowly missed being in recession, thanks to slightly above zero GDP growth in Q4 2019.

These major economies were already weak even before they were fully put into lockdown due to domestic growth headwinds not related to covid-19.

Nevertheless, unsurprisingly GDP growth contracted more sharply in Q1 in countries which instituted early and/or aggressive national lockdowns (e.g. many Asian economies and Eurozone economies, including Italy, France and Spain).

Conversely, economies which i) did not introduce national lockdowns (e.g. Sweden), ii) introduced them later (e.g. United Kingdom) or only partially (e.g. United States) or iii) introduced “softer” versions of lockdown (e.g. UK) recorded smaller GDP contractions.

Q1 2020 update – Global GDP growth slowed very sharply and world was in recession

Major economies which have so far released national GDP data for Q1 2020 account for about 88% of world GDP and are thus a good proxy for “global” growth. We estimate that (weighted) GDP growth in these 14 major economies slowed, in year-on-year terms (yoy), to -2.7% in Q1 from +3.1% in Q4 2019 (see Figures 1 & 2) and in quarter-on-quarter terms (qoq) to -4.5% from +0.6% in Q4 (see Figures 1 & 3).

 

Lessons learnt from Q1 collapse in global GDP 6

 

Three weeks ago we estimated, based on the positive historical correlation between the global PMI Composite Index and 4X Global Research’s own quarterly global GDP series that growth had slowed to about 0.5% yoy in Q1 from 3.0% in 2019 (see Growth interrupted: World was in recession in Q1 2020, 24th April 2020). This would have implied that global GDP contracted about 1.7% qoq in Q1. However, we warned that already-released national accounts data pointed to global GDP growth having slowed far more sharply in Q1 than implied by the PMI Composite Index, to about -3.1% yoy and -5% qoq.

Recently-released GDP data for the United States, European Union, Japan, United Kingdom and a number of large emerging market economies have given further weight to this risk. Figure 2 shows that amongst major economies, Hong Kong, China, the European Union, Japan, the United Kingdom, Canada, Thailand and Philippines recorded negative year-on-year GDP growth. China’s 6.8% yoy contraction accounted for the bulk of the 2.7% yoy contraction in “global” growth. Only Colombia, Korea and Indonesia recorded year-on-year growth rates of over 1.0% in Q1, according to our estimates.

 

Lessons learnt from Q1 collapse in global GDP 7

 

Nearly half of these major economies recorded positive year-on-year GDP growth in Q1 but this had more to do with reasonably robust growth in the preceding three quarters than with strong growth in Q1 per se. Indeed, of these 14 major economies only Chile recorded positive quarter-on-quarter GDP growth in Q1 (see Figure 3).

Moreover, the economies of Hong Kong and Japan were already in recession in Q1 (two consecutive quarters of negative quarter-on-quarter GDP growth). The European Union, United Kingdom, Canada and Thailand only narrowly missed being in recession, thanks to slightly above zero GDP growth in Q4 2019 (it averaged only 0.1% qoq in these four economies). The bottom line is that these major economies were already weak even before they were put into lockdown due to domestic headwinds not related to covid-19 (in the case of the United Kingdom Brexit-related and political uncertainty, in the case of Japan the impact on consumer demand of the consumption tax introduced in October 2019).

 

Lessons learnt from Q1 collapse in global GDP 8

 

No surprise that national lockdowns major contributor to relative GDP growth rates

Many domestic and international factors impacted relative domestic GDP growth rates in Q1 and will influence growth in Q2 and beyond. However, the main factor has been and will continue to be the extent to which national lockdowns were introduced and are being relaxed, along with associated self-isolation and social distancing measures, in our view.

As a rule of thumb GDP growth contracted more sharply in Q1 in countries which instituted early and/or aggressive national lockdowns (e.g. many Asian economies and Eurozone economies, including Italy, France and Spain) – see Figure 4. Conversely, economies which i) did not introduce national lockdowns (e.g. Sweden), ii) introduced them later (e.g. United Kingdom) or only partially (e.g. United States) or iii) introduced “softer” versions of lockdown (e.g. United Kingdom) recorded smaller GDP contractions.

 

Lessons learnt from Q1 collapse in global GDP 9

 

We see no reason why GDP growth in the economies which account for the other 12% of world GDP (and have not yet released Q1 national accounts data) was materially different and thus derive that:

  1. Global GDP growth in Q1 was at its weakest in over thirty years, at least in quarter-on-quarter terms (see Figure 5). The coronavirus pandemic and economic impact of associated governmental measures (including national lockdowns) and changes in consumption and investment behaviour brutally interrupted any hope of even a tentative recovery in global GDP growth in 2020. By comparison the slowdown in GDP growth in 2008 was more gradual even if it did gather pace in Q4 2008.
  2. The GDP growth recorded between Q1 2018 and Q4 2019 (i.e. close to two years) was almost entirely wiped out in Q1 2020. Put differently global GDP (in real terms) in Q1 was only marginally higher – about 0.5% – than in Q1 2018.
  3. The world was very much in recession in Q1 2020 for the first time since 2009, based on the IMF’s definition. With world population growth running at about 0.3% qoq, per-capita “global” GDP contracted nearly 5% qoq in Q1 and the IMF’s main pre-condition for a global recession (“a contraction of Purchasing Power Parity (PPP) adjusted World GDP per capita”) was met. Moreover, the other IMF pre-condition for a global recession – a decline or worsening in at least one of seven additional global macroeconomic indicators – was also very likely met in Q1. Specifically, global industrial output likely contracted in quarter-on-quarter terms in Q1 (see Growth interrupted: World was in recession in Q1 2020, 24th April 2020).
  4. Global GDP in nominal terms was about $4.5trn lower than it would have been had real GDP growth remained unchanged in Q1 2020 at around 0.7% qoq, according to our estimates (global headline CPI-inflation in Q1 2020 was broadly unchanged from Q4 2019 according to the World Bank). To put this in context, this loss is equivalent to somewhere between the nominal GDPs of Germany ($3.9trn) and Japan ($5.2trn).

 

Lessons learnt from Q1 collapse in global GDP 10

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