28 October 2020

Global Economic Recovery Shows Signs of Slowing

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LONDON—The global economy is bouncing back strongly from the collapse it suffered in the spring, but fresh data suggest the early gains from the lifting of coronavirus lockdowns are already exhausted, adding to evidence that the world economy could take many months, if not years, to heal.

Fresh figures from the U.K. provide valuable insight into the state of the continuing economic recovery. The country is one of a handful of economies to release month-to-month figures for economic growth and is also the largest to do so, offering a more up-to-date snapshot than quarterly gross domestic product figures provide.

The U.K. economy grew 6.6% in July from June, having expanded by 8.7% in that earlier month. That puts the U.K. on track for a 15% gain in output in the third quarter, following a 20.4% drop in the second.

Big Swings

In recent months, economic output has plummeted and then recovered strongly in countries that provide a monthly measure.

However, output remained 11.7% lower than it was in February, the last month before the pandemic began to disrupt the economy. Output in the services sector, which relies more on face-to-face contact, was down 12.6% from February, while industrial output was down 7%.

The figures strengthen the view of many economists that a return to pre-coronavirus levels of output will be painfully slow in most of the rich world, as the coronavirus deters everything from travel to entertainment to office work.

Economic data that has a good record of anticipating growth indicates that strong growth in the third quarter will likely be followed by more modest expansion as companies, workers and governments adjust to what could be an extended period of uncertainty over the evolution of the pandemic and the availability of a vaccine.

“As long as the major economies do not need to get into generalized lockdown, the economy should continue to mend, but cannot sustain the spectacular rebound seen upon reopening businesses a few months ago,” said Gilles Moëc, chief economist at the Axa insurance company. “The hard part starts now.”

Economists don’t expect the British economy to return to its pre-pandemic size until 2022. The U.K. suffered the most severe decline in output among rich countries during the second quarter, but the month-to-month sequence of decline and recovery has been broadly similar in other countries, including the U.S.

The Federal Reserve Bank of Atlanta estimates that the U.S. economy is on track for an expansion of 7% in the third quarter, following a contraction of 9.1% in the three months through June. Economists expect it to expand by just 1.25% in the fourth quarter and to recover to pre-pandemic output levels only in early 2022.

The global economy contracted for a second straight quarter in the three months through June, with widespread lockdowns and individual efforts to avoid infection dealing a severe blow to activity.

Across the Group of 20 leading economies, the 3.4% decline in output recorded in the first three months of the year was already the largest since records began in 1998, but the second-quarter drop was without precedent in the decades since the end of World War II.  

The turning points in activity during the pandemic have been matters of months, not quarters. Outside China, the declines in output were concentrated in March and April, with recoveries in many countries starting in May and strengthening significantly in June and July as lockdowns were lifted.

According to figures released this week, Norway’s economy—which shrank less dramatically than some of its European neighbors this spring—expanded 1.1% in July, slower than June’s growth rate. Output in July was just 4.7% below its February level.

In a blog post Friday, the European Central Bank’s chief economist, Philip Lane, sounded a cautious note on Europe’s stuttering economic recovery and weak inflation rate, leaving open the door to a fresh burst of stimulus in the coming months.

Business surveys indicate that the global recovery continued for a fifth straight month in August. A key measure of business activity in 45 countries, compiled by data firm IHS Markit on behalf of J.P. Morgan and based on responses from purchasing managers, hit a seven-month high.

But there were signs of fragility as fresh outbreaks of the virus prompted new restrictions and additional caution among consumers, with declines in activity recorded in Japan, India, Australia, Kazakhstan, Spain and Italy. Between them, those countries account for 15% of world output.

Write to Paul Hannon at paul.hannon@wsj.com, and Jason Douglas at jason.douglas@wsj.com.

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