New data shows pandemic’s economic impact

With many countries, including Australia, having reported their national accounts for the April to June quarter, we have 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.

The new data also reinforce 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.

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. Australia’s 7.3 per cent first-half contraction puts us in a relatively favourable light, even though it was in all likelihood by far the sharpest decline 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. But some have paid a much bigger price than others. Many factors would account for this, one of which is the nature and stringency of government-imposed restrictions on economic and social activity.

The chart superimposes a measure of those restrictions and shows a rough correlation between greater stringency and larger declines in GDP. 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 imposed by restrictions worth the benefits achieved?  And are there better targeted restrictions and other measures that would yield the same or greater benefits at lower cost?

These questions should weigh heavily on those formulating relevant policies, and particularly at this time on Victoria’s Premier Dan Andrews.