The Covid-19 crisis is only at its premise in many countries. Still, the economic impact of the crisis is already being felt, and no one knows when the situation will return to normal. China, the first country to be affected by the epidemic, is also the most affected economically – for the time being. European countries, Italy in first position, and the United States will also suffer greatly from the consequences of the pandemic. What can we therefore expect in the coming months? How can each affected country, but also the European Union as a whole, cope with this health and economic crisis, which has created more panic on the financial markets than was ever seen before? Answers from Eric Chaney, economic advisor for Institut Montaigne.
Now that the pandemic has reached all parts of the world, can we try to quantify its economic impact?
We are starting to get Chinese data that give an idea of the crisis’ impact on this country. Since China suffered the pandemic before the others, it provides a starting point for estimating what the impact on other countries, France in particular, might be.
Chinese figures for value added in industry and services (excluding government) show a 13% drop for the January-February period compared to January-February of the previous year, and it is hard to imagine things could have been much better in March. Since growth in the previous quarter was 6% compared to one year ago, the value added drop is in the order of 20%. Taking into account the fact that government output probably did not fall by much – in the healthcare sector, it probably even strongly increased – we can estimate that the fall in Chinese GDP in the first quarter of 2020, compared to the last quarter of 2019, is somewhere in-between 10 and 15%. As a median point, a quarterly decline of 13% would translate into a 9% drop compared to the first quarter of 2019. Assuming that a return to normal levels of activity takes six months and is followed by sustained growth, Chinese GDP could decline by close to 3% in 2020 before rebounding above trend in 2021.
Even if economic structures are different, the Chinese experience can serve as a benchmark for countries who, like China, have finally resolved themselves to implementing a strict containment of their citizens forcing many companies in most sectors to shut down.
Let us take the example of France. No statistics on actual activity in March are currently available. Business surveys conducted by the French National Institute of Statistics, INSEE, will provide a qualitative idea of the impact of the government's containment decisions at the end of the month. But in the meantime, it is not absurd to assume a Chinese-style scenario, shifted by one quarter. To set the scene, a 12% drop in activity in France in Q2 2020, followed by a return to normal over the rest of the year and the beginning of 2021, would translate on an annual basis – the only figure that counts for public finances – into a drop in GDP of around 5% in 2020, followed by a strong rebound to 6% in 2021.