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Picking off the weak

Finance and
economics
Apr 16th
How deep will
2020 edition
downturns in rich
countries be?
Those in central and southern Europe seem most
vulnerable
Editor’s note: The Economist is making some of its
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A s the virus upends productive activity

across the world, the question now is how
bad things will get. On April 14th the imf warned
that the global recession would be the deepest for
the best part of a century. But the severity of the
pandemic and the uncertainty around the
duration of lockdowns are such that economists’
models, trained on business cycles in the post-war
era, are of little use. Some companies, such as
Starbucks and Dell, have pulled their guidance on
annual earnings, declining even to hazard a guess
about the future. Amid the fog, however, one thing
seems certain: some economies will su!er much
more than others.

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Economic crises expose and exacerbate structural
weaknesses. Analysis by The Economist of "ve
decades of gdp data "nds that growth rates in rich
countries tend to converge during expansions, as
even the weakest economies are pulled along. Yet
during downturns performance diverges
markedly. In the "rst half of the 2000s the average
annual gap between the gdp growth rates of the
best- and worst-performing rich countries was
"ve percentage points. In 2008-12, in the recession
that followed the global "nancial crisis, the gap
widened to ten points.

This recession will be no di!erent. Three factors

should help separate the bad economic outcomes
from the dire ones: a country’s industrial
structure; the composition of its corporate sector;
and the e!ectiveness of its "scal stimulus. The
Economist has used indicators of these to rank,
roughly, the exposure of 33 rich countries to the
downturn. Some, such as those in southern
Europe, appear far more vulnerable than America
and northern European countries (see chart).

Take industrial structure "rst. Lockdowns will

slam countries that depend on labour-intensive
activities. Those with large construction sectors,
activities. Those with large construction sectors,
such as many central European countries, look
vulnerable. So do those that rely on tourism—it
accounts for one in eight non-"nancial jobs in
southern Europe. Conversely, those with large
mining industries, which require less labour, may
do better. Here Canada looks relatively insulated.

Industrial structure also in#uences the share of

people who can work from home, and thus dodge
the worst disruption of the lockdowns. In a paper
published on April 10th Jonathan Dingel and Brent
Neiman of the University of Chicago estimate that
fully 45% of jobs in Switzerland could plausibly be
done from home. Many Swiss work in industries,
such as "nance, where all they really need to do
their job is a laptop. Others elsewhere do not have
this luxury. Less than a third of jobs in Slovakia, a
big manufacturing hub, can be performed
remotely; home working is also di$cult in
southern Europe. Research by Indeed, a job-search
website, and Ireland’s central bank "nds that since
the pandemic began, countries where home
working is less prevalent have seen bigger falls in
the number of online job advertisements.

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The shape of the corporate sector is the second

consideration. Economies with a large share of
small "rms are more likely to be scarred by long
shutdowns. Minnows tend to have few if any cash
bu!ers, making it hard for them to survive a
drought in revenues. A survey by researchers at
the University of Chicago, Harvard University and
the University of Chicago, Harvard University and
the University of Illinois "nds that a quarter of
small "rms in America do not have enough cash
on hand to last even a month. Nearly half of
Italians and Australians work for "rms with fewer
than ten employees, compared with a "fth in
Britain and an even lower share in America.

A third determinant of the economic pain to come

is the nature of "scal support. Rich countries have
deployed stimulus on an unprecedented scale.
Even by the most conservative estimate, these
packages are more than twice as large as in 2008-
09. But the size of the stimulus varies widely
across countries. Most tallies "nd that support in
America and Japan is the most generous, as a
share of gdp; investors, who see their assets as a
haven, are happy to provide the necessary
funding. Yet some euro-area governments with
high debt levels are more cautious, perhaps
constrained by the fear that, as members of a
currency union, they enjoy only a partial backstop
from the central bank. The average "scal boost in
France, Spain and Italy, as a share of gdp, is about
half of that provided in Germany.

The design of the stimulus, though, matters as

much as its size. Broadly speaking, rich countries
have taken one of two approaches to preserving
living standards. Some are concentrating on
supplementing household incomes. America is
sending cheques to families and making
unemployment bene"ts far more generous; Japan
is o!ering handouts to the needy. By contrast,
policy in northern Europe and Australia aims
mostly to maintain employment by subsidising
wages.

Government pledges to protect jobs are normally a

 Government pledges to protect jobs are normally a
bad idea. They prevent workers moving from
failing sectors to up-and-coming ones, slowing
the recovery. The coronavirus recession may be
di!erent, however. If the lockdowns are lifted
soon, some European economies will be able to
resume production quickly. Elsewhere workers
will have to search for jobs, and bosses to hire
them. Some American workers will even do better
to stay on bene"ts than "nd work; according to
Noah Williams of the University of Wisconsin-
Madison, bene"ts in six states could exceed 130%
of the average wage. That will mean it takes longer
for gdp to recover its pre-pandemic level once the
lockdowns lift. Instead of leading to a painful few
months, the damage could be much longer-
lasting. 7

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This article appeared in the Finance and economics section of the

print edition under the headline "Picking o! the weak"

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