Ranking the economic performance of the world's economic regions

Chief Economist's View 

Download the PDF version including our economic update by region here: Ranking the performance of the world's economic regions

Next week, the Australian Bureau of Statistics releases GDP data for the last quarter of 2020. This completes the data releases across the major economies and gives us a picture of the current state of the global economy. In this week’s Brief, we review the global economy and compare the relative performances of the major economic regions. With optimism over the outlook growing, leading to a surge in interest rates, we consider the major drivers of growth and rank the prospects for the major economies and economic regions.

While the recovery from the depths of the June quarter of last year has been stronger than most had anticipated, there remains large dispersion across the globe. The best performing region is our own, East Asia, and China is in the lead with its GDP level already 6% higher than its pre-Covid level. Other countries in the region have also performed well with Taiwan and Vietnam also besting their pre-Covid GDP levels. Even excluding China, our region is the best performing region in the globe, being just 1.2% lower than its pre-Covid level.

Australia is lagging the regional average, and sits an estimated 2.2% below pre-Covid level, just ahead the US, with a deficit of 2.4%. The laggard has been Europe, where the euro area is still down by 5% and the UK is down by almost 8%. What has been driving these rankings? The ability to handle Covid is one of the dominant factors in the rankings. Generally speaking, the East Asian countries went into sharp lockdowns early and brought the virus under control. They then kept international borders closed, limiting the risk of second and third waves of the virus. Europe and UK couldn’t have taken a worse approach to managing the virus. By delaying a lock down, the length and severity of the shutdowns of their economies in the face of the first wave were long and severe. Then, the reopening of the economy over the last European summer, when the virus was still in circulation, including opening international borders, led to an enormously large second wave.

The Europeans’ adherence to the Schengen Agreement, that is the bloc’s adherence to free passage across member borders, added to the problem. This has led to further severe lockdowns, causing a yoyo effect that has decimated growth towards the latter half of the December quarter. The US also had an abysmal record of containing Covid, but unlike the Europeans, were less willing to go into lockdowns, particularly in States with Republican governors. This greater willingness to trade off positive economic outcomes for negative health outcomes differentiates the US from Europe and helped the US economy outperform its European counterparts over 2020.

Another important factor in determining economic performance over 2020 was the strength of consumer spending, as governments provided massive income support to households. Given lockdowns and the closure of international borders, the surge in consumer spending favoured the purchase of goods over services. The sharp increase in demand for goods meant a boost for manufacturing sectors. Asia is the manufacturing hub for the global economy and with factories re-opening quickly in our region and seaborne trade rebounding strongly following the initial COVID disruptions, the increased demand for goods provided a backstop of demand for our region.

These factors - control of Covid and the sectoral composition of the economy - along with the extent of fiscal stimulus, will continue to be the main influences on global growth over 2021. However, unlike 2020, these factors are tending to favour the laggards of US and Europe compared to the countries in our East Asia region. In terms of controlling Covid, the emphasis is now on the roll out of vaccines. Here, developed economies have the advantage over emerging market economies. Developed economies, in particular North America and Europe, dominate the share of available vaccines with access to dosages covering 200% or more of their populations. In addition, they are absorbing most of the vaccines with high efficacy such as Pfizer and Moderna. In terms of fiscal stimulus, North America leads the way with stimulus in excess of 10% of GDP. Next, we have Europe, with most economies somewhere in the range of 5 to 10%. Lastly, the US and European economies are heavily weighted to the services sectors, so as herd immunity is achieved and their economies return to normal, the boost to the service sectors will amplify growth.

What about the East Asia region? Most countries in our region are developing nations and have far less access to vaccines, with population coverage rates less than 100%. Even in China, which is one of the global centres of vaccine production, available vaccines cover less than 80% of the population. Also, they have access to the less potent vaccines such as AstraZeneca and the China vaccines, which are between 70% and 50% effective. The region is also behind in terms of fiscal stimulus, averaging between 2.5% and 5% of GDP. Finally, the region is more weighted to the manufacturing sector rather than the services sector compared to developed economies. As the consumer tilts back to services, this may prove a further relative headwind to the region.

The roll out of vaccines and the prospect of large fiscal stimulus packages in the US and Europe will drive strong growth over the entire global economy over 2021. However, with a much slower roll out of vaccines and less fiscal stimulus in the East Asian region, we can expect some moderation in growth differentials between our region, the US and Europe.

Table 1: Financial market movements: 18 - 25 February 2021

Source: Bloomberg