24 Jun Which economies look to be hardest hit by COVID19?
At the beginning of June, the Organization for Economic Cooperation (or the OECD) released its global economic outlook. It painted a very sombre picture of how all the economies around the world would cope in 2020 and beyond.
Here, in this blog post, we look at the four countries that the OECD anticipate will be the hardest hit of all economies and are the countries that struggled to keep the pandemic contained. They are Spain, France, Italy and the UK – all of whom had some of the highest death rates per head of the population in the world. This was in spite of having some of the most severe lockdown restrictions imposed by their governments.
Spain’s Economy and Coronavirus
The country that the OECD estimates will be the hardest hit in terms of the magnitude of a recession is Spain. The organization believes that Spain will see an 11.1% decline in its GDP if there is just one wave of the disease. If there is a second wave of infection, this looks to rise to 14.4%.
The reason that it will be so hard hit is that not only did the country have to struggle with one of the biggest outbreaks in the world, the make up of its economy made it particularly vulnerable to the extensive lockdown measures. With sectors like tourism, retail, hospitality and transport all making up a large portion of the country’s GDP, the economic hurt felt by people staying in their homes was magnified.
Plus, Spain also will have to deal will political instability blighting its government’s capacity to push through any policies at all. Spain has seen four national elections in the last four years alone. Government effectiveness is particularly important to any country’s success, but for Spain, blunting the abilities of the government can be extremely harmful thanks to its level of debt. As one of the more indebted nations of the Eurozone, the country is estimated to see its debt to GDP ratio increase even more this year. In fact, in 2020, the budget deficit is set to rise to 11% having started the year at 3%, according to the Bank of Spain.
France’s Economy and Coronavirus
France’s economy, like Spain’s, has already seen a huge contraction in the first quarter of 2020 – in fact, it has seen its biggest contraction since 1949. The OECD anticipates that France will eventually see a negative 11.4% change in its GDP, which could extend to a 14.1% contraction if the country sees a second wave of infections.
Again, one of the biggest challenges that France experienced that will create such a huge contraction was the size of its outbreak. Like some of its European peers, it struggled to keep the virus contained and so its lockdown measures were strict in reaction to it.
However, as the French economy is so dependent on its population spending, the impact felt was quick. Like many countries, France only allowed its citizens to leave their homes to buy essentials, to go to work or to keep medical appointments. The result of this was, by the end of March, consumer spending declined by over 6%.
The government was able to pass through help relief packages to take the sting out of the Coronavirus on the economy. The packages amounted to providing the population with €110 billion of support. However, even though this equates to 4% of the country’s GDP, it is thought that bankruptcies will soar in the second half of 2020 and unemployment will rise sharply as a result. This will only seek to add a further drag on the economy.
UK’s Economy and Coronavirus
The UK looks to be the hardest hit by COVID19 of all the G7 countries. The OECD believes that it will see its economy contract by 11.5% if there is just one wave of the pandemic, if there is to be a second outbreak this looks to rise to 14%.
Similar to Spain, the reason that the pain felt by the economy will be so acute is not only down to the size of the outbreak, but also down to how the economy itself has developed. It is highly dependent on the services sector – including hospitality, tourism and financials. With the Summer months looming with lockdown measures only being eased a little, the tourism industry looks set to have its hardest year on record, with many businesses wondering if they will remain viable.
However, the UK also has one very big problem that could have had a big impact on its economy even without the Coronavirus. Its post Brexit negotiations for a Eurozone trade deal are still looming and the chances of those negotiations breaking down are large. This poses obvious large barriers to the UK’s ability to trade with its largest trading partner. While some have recommended the UK negotiate to stay longer in the single market given the outbreak, the Government itself has not indicated that it will look to do so.
Italy’s Economy and Coronavirus
Italy was the first country outside of China to impose a lockdown on its population in an effort to contain the Coronavirus and limit the death toll. The result of these restrictions on people’s movements has meant that the OECD believes that the country’s GDP will contract by 11.3% in 2020, which could increase to 14% if the country struggles again with a second wave of infections.
Similar to Spain, Italy is also a country laden with debt, which is one of the reasons that the impact on its economy will be compounded thanks to the Coronavirus outbreak. By the end of 2020, Italy will see its public debt reach 160% of its GDP. While the ECB has tried to minimize the economic impact of the Coronavirus on Italy by buying huge portions of its bonds, the magnitude of the outbreak weakened the effectiveness of the bank’s actions. The country’s budget deficit looks set to reach over 11% this year too.
The Italian government did try to limit the damage the Coronavirus would wreak on its economy by announcing a series of packages in addition to the ECB buying some of the country’s debt. For example, it suspended mortgage payments for citizens who were quarantined. However, the anatomy of its economy is one of the reasons that Government intervention has limited impact. Its manufacturing sector was left vulnerable due to being largely made up of low-cost producers that were highly sensitive to the drastic changes in a global supply chain. However, perhaps most importantly, its tourism industry will suffer a major setback this Summer with demand by holidaymakers all but drying up.
The Impact of COVID19 on The Global Economy
It’s important to note that the OECD’s projections are the most pessimistic seen. Indeed, while the IMF and the World Bank by no means paint a rosy picture of the global economy in 2020 and 2021, their predictions are not as gloomy. However, the OECD believes that in total, the global economy will shrink by 7.6% in 2020 and won’t reach 2019 figures for another two years.