From the beginning of 2020 onwards, the coronavirus pandemic has been shaping economic developments around the world. However, as the Bundesbank writes in the latest edition of its Monthly Report, some economies have pulled through the crisis better than others. It notes that, whilst in a number of countries, such as the United States and China, economic output has already returned to – or even exceeded – its pre-crisis level, in others it is still lagging behind, including in the four largest euro area countries: France, Germany, Italy and Spain.

According to the Monthly Report, within the euro area, too, the economic impact of the pandemic has varied widely across the individual countries, with gross domestic product (GDP) losses (in each case compared with pre-crisis levels) ranging from 4½% in Lithuania to 22% in Spain at the peak of the crisis in the second quarter of 2020. “Even one year later, following a rapid but partly bumpy recovery, the situation has remained mixed,” the report continues, noting that, while GDP in some Member States had exceeded its respective pre-crisis level once again as early as in the second quarter of 2021, in Spain it fell short by just over 8%. The backlogs were somewhat lower in Italy, at 4%, as well as in Germany and France, each at 3%.

Economic impact of different containment measures

“One explanation for the mixed global picture among countries could be differences in their responses to the pandemic in terms of the measures taken and their duration,” write the Bundesbank economists, who remark that, until recently, some countries implemented drastic measures in an attempt to stop the virus from spreading. Others took a less tough stance, for example because the infection figures allowed it or because additional restrictions appeared too costly in light of the economic situation, they add. Estimates show that, although measures that curbed mobility such as workplace closures and stay-at-home requirements were successful in slowing the spread of the pandemic, they were accompanied by major economic losses, the report continues, with high-contact economic sectors such as the hotel and restaurant sector or the tourism sector proving to be particularly vulnerable. “Economies for which these sectors play a key role were thus hit particularly hard,” the experts write.

Monetary and fiscal policy cushioned the impact of the crisis considerably

According to the Bundesbank, alongside the course of the pandemic as well as the government-mandated and self-imposed behavioural adjustments, policymakers are likely to have played a major role in economic developments. The experts note that, in the industrial countries, in particular, monetary and fiscal policy accommodation significantly cushioned the immediate impact of the crisis. “Simulation calculations suggest that the cushioning effects were even greater in the United States than in the euro area,” the article states. It notes that, in many places, specific measures also protected jobs, averted corporate insolvencies and prevented turmoil in the financial system.

Global vaccination campaign as the priority

The economic recovery has now made good progress in many places, particularly on account of the increasing percentage of the population that is fully vaccinated, the Bundesbank writes. The recovery has not been entirely smooth, however, with shortages of key intermediate inputs and delivery delays stalling the recovery process.

The experts remark that, for the advanced economies, the longer-term damage to the economy will tend to be fairly minor, but in many developing and emerging market economies where vaccination campaigns have been progressing at only a sluggish pace, a comprehensive recovery will be lagged. “This increases the risk that economic scars will remain.” The low vaccination rates are also encouraging new strains of the virus to develop, which could trigger renewed economic setbacks in those countries, the report continues. According to the experts, global economic interconnectedness means that this would also damage the advanced economies. It thus remains a priority issue for the international community to push ahead with vaccination campaigns around the world, they add.

Structural change must not be hindered

According to the Monthly Report, economic policy in the industrial countries should support macroeconomic recovery until the end of the pandemic and thus try to avoid knock-on damage. “Thereafter, however, fiscal consolidation needs to be tackled,” writes the Bundesbank, adding that the past one-and-a-half years have shown how important it is to have fiscal policy buffers in times of crisis. Moreover, the structural change that the pandemic has made necessary should not be hampered by economic policy assistance measures, the report notes. Many of the measures taken during the crisis were targeted at keeping firms from going under, regardless of whether or not their business models were sustainable in the long term, it continues. As the pandemic is gradually overcome, these forms of assistance should be scaled back, the experts explain.