Coronavirus control and big spending prove a magic economic mix

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A year after coronavirus spread to most of Europe and North America, we can take stock of the economic league table. Even more important are the lessons we should learn from economic performance in 2020 for the remainder of the pandemic because, sadly, Covid-19 has not finished with us yet.

For countries where quarterly data exists for the whole of 2020, there is a remarkable difference between China, at the top of the league, producing 6.5 per cent more goods and services at the end of last year than in the same quarter of 2019 and Spain, currently bottom, where output dropped 9.1 per cent.

The patterns from the data have become clearer through the year. Countries that controlled the virus best enjoyed enviable economic performance, such as the Asian economies of China, Japan and South Korea, or Norway in Europe. The reason is obvious: if you do better with the virus, the need for mandatory or voluntary restrictions on daily activity decreases.

Bar chart of YoY GDP growth Q4 2020 (%) showing Economic performance league table

But the league table also shows there is no one-for-one relationship between Covid-19 case rates and economic growth rates. Having a large manufacturing sector was a boon when many of the world’s consumers could not buy services and splashed out on household goods instead. This explains much of China’s success. Conversely, 2020 was not the time for economies that specialised in consumer-facing services such as international tourism, which hit Spain particularly hard.

A willingness to borrow heavily from future taxpayers was able to mitigate poor virus control, as the US can testify. But even in the UK, where spending was almost as large, the overall picture can look bad if statisticians take an international purists’ view of the measurement of government output. Emerging economies that suffered from both high levels of infections and had few fiscal buffers fared worst of all, leading to some deeply troubling increases in poverty.

As so often in economics, the broad patterns in 2020 convey useful information, but it is unwise to make hard judgments on the exact position of any country. And remember, again, we are far from the end of the pandemic.

For some, the immediate outlook in 2021 is brighter. Having sought a return to normal too fast last year, the UK appears set to benefit from its impatience this year with an impressive delivery of vaccines that should allow a more durable loosening of restrictions.

The main vaccine effects are for the future, when much of the population has some immunity. So far this year across Europe, Covid-19 case numbers have been dropping as a result of lockdowns rather than jabs. So, as long as the EU resolves its vaccine missteps by the summer, it can look forward to a much better year with protection from another winter virus wave in place. But the US is likely to outperform again because it is vaccinating fast and still willing to borrow and spend more.

Europe will need to reflect soon on whether it has offered enough fiscal stimulus and when to move from supporting companies to hold on to their staff to a more US-style position of supporting people in finding new jobs.

Ultimately, countries should not feel too smug or disheartened by the league tables. By the middle of the decade, economic performance in 2020 and 2021 will be a small component of success in dealing with coronavirus. Those that suffer the least will have been careful with their nations’ health, bold with stimulus in a recovery phase and sufficiently flexible in enabling people to move jobs and sectors to fit the needs of the post-pandemic world.

Anyone who claims to know what the office, the city or the economy of the future looks like is surely a charlatan. But we know that governments and economies that can adapt quickly will succeed.

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