American and British economies over the Covid-19 pandemic: separating like never before
Since early 2020 the Covid-19 pandemic and the policies implemented in response have hammered economies around the world. Most countries fell into a recession in 2020, and the economies that expanded generally did so at a far slower pace than the pre-pandemic trend.
As the pandemic’s health burden declines and suppression policies are gradually removed one can start to evaluate how different countries fared. In this article I’m going to focus on economic outcomes in two countries: the United Kingdom and the United States. I do so because of the easy availability of GDP data; if I find similar data for Australia, or New Zealand or any other country, I’ll gladly run the analysis. (What is needed for this kind of analysis is the economic output for a given quarter in absolute terms, not in terms of percentage change from the year before)
While the article does not delve into the pandemic’s health outcomes, it’s worth pointing out that the health impact has been roughly similar in both countries. Through the tend of the second quarter of 2021 cumulative death toll was three or four percent higher in the UK, according to Our World in Data. Such a small gap may purely be the result of accounting differences. Any gap in economic performance is unlikely to have been caused by differences in health impacts.
For the UK the source of GDP data is the Office for National Statistics. As of this writing (August 19th) GDP figures are only available up to the first quarter of 2021.
Economic output in the United Kingdom fell in the first quarter of 2020, collapsed in the second quarter, and by the first quarter of 2021 still had only recovered to roughly the level it had in 2014.
Cumulative GDP over the five pandemic quarters for which data is available is equivalent to 113% of yearly pre-pandemic GDP (i.e. the GDP value for 2019).
Now let’s turn to America. The Federal Reserve publishes this series for inflation-adjusted GDP. While the US economy also endured a collapse in the first half of 2020, its recovery has been much faster. By the first quarter of 2021 output was less than 1% below the pre-pandemic record, and in the second quarter well above that mark.
Economic product between January 2020 and March 2021 was equivalent to 121.6% of 2019 GDP. That is to say, the US had an advantage in economic output, versus the UK, equivalent to 8.6% of yearly pre-pandemic GDP.
Is that unusual?
One does not expect different countries to grow their economies at the same rate forever, even if they’re neighbors or culturally close. There are both short-term fluctuations and long-term divergence, like Ireland growing much richer than Northern Ireland over the decades. During the last year and a half the UK has diverged from the US for the worse, but maybe one should expect that kind of thing to happen from time to time?
To answer that question I look at all the quarterly GDP data available — the ONS offers numbers going back to 1955. I use 1955 as the first baseline, and then calculate how much economic product the UK delivered over the following five quarters (meaning 1956Q1 to 1957Q1). I then move forward one quarter and repeat the operation, using 1955Q2–1956Q1 as the baseline. And so on until 2021Q1. This gives a total of 265 observations, representing the economic performance of the UK over that time.
I then do the same for the US and calculate the difference in economic performance between both countries, by subtracting US figures from the UK’s. Which is to say: a data point below zero is a period during which the US had stronger GDP growth than the UK. And an observation above zero is a period during the UK had the upper hand.
All 265 observations are represented in this histogram. The Excel files with GDP data and the R code to make the chart are available in this Google Drive folder.
The US has generally grown faster since 1955, but the average for any five-quarter period is a difference of less than 1% of GDP. In a majority of such periods the difference in economic growth between both countries was less than 2%.
And a difference of 8.6%? That has occurred literally once: the five pandemic quarters are the short bar at the left-side end of the chart.
So what has happened since the beginning of 2020 is not usual at all. Since the start of detailed GDP data the British economy had never performed this badly compared to America’s.
I’ll run the analysis again when second-quarter figures for the UK are published. My expectation is that the numbers will show a gap with the US equivalent to more than 10% of GDP.
And after that? My belief is that the gap will at least stop growing, or maybe even shrink, since England has removed most of the Covid-related measures that hindered economic activity and other parts of the UK are doing likewise.