PRELIMINARY: The GDP Impact of Economic Shutdowns
Since mid-March—the onset of the COVID-19 outbreak in the U.S.—economic activities across the country have been suspended due to stay-at-home orders imposed by state and local governments. As a result, U.S. economic output, especially in the second quarter of 2020, is expected to drop significantly. We have seen several estimates of very negative GDP growth rates, some clocking in at –30% or lower. For example, the Conference Board predicts second-quarter U.S. real GDP will contract –33.3% at annual rates.1 If this forecast is accurate, the massive drop in U.S. quarterly GDP will be unprecedented. These numbers fall into uncharted territory and hence should be interpreted with care.
Conventionally, U.S. quarterly GDP is calculated by the BEA, and its growth rate is reported as the quarter-on-quarter (QoQ) annualized growth rate. The term QoQ means that the GDP growth is measured between two consecutive quarters. For example, the QoQ GDP growth rate for 2020 Q2 is calculated as the percentage change in seasonally adjusted GDP from 2020 Q1 to 2020 Q2. This QoQ growth rate is then annualized, meaning that the gross quarterly growth rate is raised to the fourth power.2 Hence, the aforementioned prediction of –33.3% Q2 GDP growth actually means that the second-quarter GDP (relative to the first quarter after seasonal adjustment) drops by 9.63% ((1 –33.3%)^(1/4) – 1 = -9.63%). The large difference between these two growth numbers (–33.3% and –9.63%) results from annualizing the quarterly rate to a yearly rate, a calculation that assumes the current-quarter growth rate lasts for the whole year. However, current forecasts for third and fourth quarter U.S. GDP offer a much brighter outlook, indicating that this dramatic decline in GDP is not likely to last the whole year.
When the economy is functioning normally, the QoQ annualized rate makes sense as an indicator of yearly economic growth, as the QoQ quarterly growth rate does not vary too much from quarter to quarter. However, as we face a unique economic situation in 2020 Q2, it might be more straightforward to look at the non-annualized GDP growth rate for the second quarter (–9.63%). Moreover, the second quarter is ongoing and with so many uncertainties ahead of the U.S. economy, second-quarter growth forecasts are likely to be updated as events unfold. Hence, we need to wait a few months to see the true impact of the economic shutdown on second-quarter U.S. GDP.
What does GDP growth look like in other countries affected by COVID-19? Some countries, such as China and Italy, experienced a large outbreak of COVID-19 earlier than the U.S. Therefore, their first-quarter GDP should have been affected to a greater extent than first-quarter GDP in the U.S. On April 29, the BEA announced the advance estimate of 2020 Q1 U.S. GDP, which decreased by 4.8% (annualized QoQ rate).3
China was the first country to experience a large outbreak of COVID-19. In response to the outbreak, China started to lock down its economy at the end of January. Hence, the Chinese economy was hard hit at least in the second half of Q1 2020 due to the economic shutdown. How large was the impact on GDP? The newest official report indicates the first quarter Chinese GDP growth rate as -6.8%, which is a very large decline, especially given the fast-growing Chinese economy in the past few decades.4 However, this number is not comparable to the U.S. growth numbers, since not all countries report GDP growth rates the same way the U.S. does. China reports its GDP growth rate in an alternative way: the year-on-year (YoY) GDP growth rate, which compares the current-quarter GDP to the quarter exactly one year ago. In this way, the growth rate is already in annual frequency and does not need to be annualized.
To make it comparable, let’s calculate the first-quarter QoQ annualized Chinese GDP growth rate. For that calculation, we need the real GDP data in the first quarter of 2020 and the last quarter of 2019, which can be found on the webpage of the National Bureau of Statistics of China. After seasonal adjustment, China’s QoQ GDP growth rate is around –10% and the annualized QoQ growth rate is –34.76%. This annualized QoQ decline in Q1 GDP in China is significantly larger than that for Q1 in the U.S., but it is not far away from the aforementioned Q2 GDP decline projected for the U.S.
Italy also experienced a large outbreak of COVID-19 in Q1 2020, starting from the middle of February. In late February, the Italian government implemented a lockdown for several of its northern regions, and on March 9 the lockdown was extended to the entire country. Therefore, the starting time of the Italian economic shutdown was earlier than the U.S. but later than China. On April 30, Italy announced its preliminary estimate of Q1 GDP. The press release mentions two GDP growth numbers: –4.8% YoY rate and –4.7% QoQ rate.5 However, the latter rate is not annualized and hence cannot be compared directly with the U.S. growth number. A simple calculation shows that the QoQ annualized rate is at –17.7%.
In short, these statistics show that GDP in China, Italy, and the U.S. has declined significantly due to economic shutdowns. However, countries report GDP growth rates quite differently, and it is important to evaluate equivalent statistics across countries to ensure accurate cross-country comparisons.
1 The forecast is updated on April 9, 2020. See https://www.conference-board.org/data/usforecast.cfm.
2 For more information on annualizing data, see https://www.dallasfed.org/research/basics/annualizing.aspx.
Preliminary, incomplete. To cite, please request author’s permission.
© 2020, Federal Reserve Bank of St. Louis. These views do not reflect the opinion of the Federal Reserve Bank of St. Louis or the Federal Reserve System.