You’ve probably heard that the COVID-19 pandemic is “bad for the economy,” but what does that claim mean? In this blog post, we review the “big three” macroeconomic variables and show the effects of the global pandemic on them in Australia, Canada, the U.K., and the U.S.
Are we in a recession?
A recession is a business cycle phase in which real GDP decreases for at least two successive quarters. In the U.S., the National Bureau of Economic Research (NBER) provides the official designation of a recession. On June 8, 2020, the NBER determined that the U.S. economy entered a recession in February 2020. This recession is currently ongoing.
What happened to the unemployment rate?
To be counted as unemployed, a person must be available for work and must be in one of three categories: (1) on temporary layoff with an expectation of recall; (2) without work but has looked for work in the past four weeks; or (3) has a new job to start within four weeks. If a person is employed (i.e. has either a full-time or a part-time job) or unemployed, then she is in the labor force.
The unemployment rate is the percentage of people in the labor force who are unemployed.
Figure 1
Figure 1 shows the official quarterly unemployment rates for Australia, Canada, the U.K., and the U.S. since 1980. Because the official statistical agencies that calculate these values differ in their specific interpretations of “looking for a job,” we cannot make cross-country comparisons. But we can see that the COVID-19 pandemic brought on increases in the unemployment rates in all four countries, and brought a record high unemployment rate in the U.S.
What happened to the inflation rate?
The price level refers to the average level of prices in an economy. Every month, a statistical agency in each country measures the price level by calculating a Consumer Price Index (CPI) which is a measure of the average of the prices paid by urban consumers for a fixed basket of consumer goods and services.
The inflation rate is the annual percentage change in the CPI.
Figure 2
Figure 2 shows the quarterly inflation rates for Australia, Canada, the U.K., and the U.S. since 1980. Low, steady, and anticipated inflation (or deflation) isn’t a problem, but an unexpected burst of inflation brings big problems and costs. For this reason, countries aim to have low and predictable inflation rates, typically targeted at 2 percent per year. Since 1992, these countries have mostly maintained these targets, with noticeable misses in the 2008–2009 and 2020 recessions. During these periods, the inflation rate decreased well below the 2 percent target and even went negative in some cases.
What happened to real GDP growth?
Gross domestic product (GDP) is the market value of the final goods and services produced within a country in a given time period. Because GDP comparisons across time reveal changes in prices and in production, economists often isolate the production change by calculating real GDP. Real GDP is the value of final goods and services in a given year when valued at the prices of a reference base year.
The sizes of economies differ greatly, so comparing the levels of real GDP across countries is uninformative. Instead, economists compare the growth rates of real GDP when looking cross-country.
The real GDP growth rate is the annual percentage change in real GDP.
Figure 3
Figure 3 shows annual real GDP growth rates for Australia, Canada, the U.K., and the U.S. since 1980, and forecasts from the International Monetary Fund (IMF) for these rates in 2021 through 2025. Between 1980 and 2019, these countries averaged a real GDP growth rate of 2.5 percent per year. Real GDP growth slowed noticeably during every recession—by the definition of “recession”—and growth rates decreased sharply during the COVID-19 pandemic, decreasing to rates between –4.3 percent in the U.S. and –9.8 percent in the U.K.
The IMF forecasts a strong recovery in all four countries in 2021, followed by the real GDP growth rates plateauing between 2021 and 2025.
Is COVID-19 “bad for the economy”?
Standard macroeconomic objectives include full employment, price level stability, and sustained long-term economic growth. The COVID-19 recession has been characterized increases in unemployment rates, very low and even negative inflation rates, and negative real GDP growth rates. On all three of our macroeconomic measures, the economy has suffered.
Multiple Choice Test: COVID-19 and Macro-3