The US recovery from COVID was a remarkable one
Us Trade Data
There are differences in the pace of recovery from COVID shocks among major advanced economies. According to the US trade data, contrary to Japan and Europe, the U.S. GDP surpassed its pre-COVID level during the third quarter of 2021. It may return to its pre-crisis trend by the fourth quarter. The pace of recovery in Europe during the second and third quarters was still quite rapid; the U.S. GDP gap with Europe has narrowed. The U.S. is notable in two aspects:
Because so much of domestic demand is for imported goods, the trade deficit has been increasing as import growth has been strong and exports are contracting. Domestic spending has recovered faster than GDP. In absolute terms, the U.S. fiscal stimulus was huge relative to other countries. The U.S. economy has been more service-oriented than other large economies and domestic demand has shifted to goods.
The pandemic spread rapidly and economic activity worldwide plunged during the first months of 2020. In response, severe lockdowns were implemented in China, then in most advanced economies. The extent of the contraction in the first half of 2020 varied from country to country. The UK and some countries of the eurozone were particularly affected, while Japan and the U.S. experienced a more moderate contraction.
The third quarter of 2020 saw the G7 economies' GDP rise. However, European countries fell further behind the U.S. during the last quarter of 2020 and the first quarter of 2021 as lockdowns were implemented to contain the pandemic. In addition, vaccine availability was slower than in the U.S. However, European economies experienced a strong recovery due to a rapid pace for vaccinations and fewer restrictions on movement and activity. The U.S. has experienced strong growth, but Japan has been slowing down as more COVID cases have been reported.
In the fourth quarter of 2019, the U.S. GDP had passed the pre-COVID level. France is the largest economy in the eurozone, with a level of activity that has almost recovered. The only country where GDP remains significantly below the pre-COVID level is Spain, which was severely affected by the pandemic, and subsequent tourism collapse.
However, many smaller advanced European economies, such as Austria, Belgium, and Finland in the eurozone, as well Denmark, Norway, and Sweden, have already achieved their pre-COVID GDP levels. These countries were generally less exposed to the most affected services sectors. The same applies to smaller, advanced economies in Asia. Taiwan, a manufacturing powerhouse, has done exceptionally well with its GDP exceeding its end-2019 level of 7 percent in the third quarter.
The U.S. GDP is more in line with the pre-COVID trend that other advanced economies. US customs data shows that comparing GDP levels underestimates the effects of the crisis. Without the pandemic, the economies would have likely grown in 2020-21. Therefore, we compare GDP at the close of the third quarter of 2021 to its pre-crisis trend. This metric shows that economic activity in all G7 countries (as well Spain) has not reached its pre-COVID trend. Current projections show that the U.S. will reach its pre-COVID trend by the fourth quarter of 2021. Most other countries will follow suit in 2022. The emergence of a new omicron variant and a fourth wave infection have raised uncertainty about how fast recovery will occur, particularly during the winter months in Northern Hemisphere.
U.S. Consumption rising faster than GDP
The U.S. recovery is more impressive than other advanced economies because of the significant increase in domestic consumer spending. The pandemic cut down on the consumption of contact-intensive services in the world. In the U.S., consumption of services remained at 1 1/2 percent of pre-pandemic levels while consumption of goods grew by 15%. Despite a sharp drop in car sales in the third quarter, durable goods consumption rose by more than 20%. The U.S. was also facing labor shortages. Despite strong labor demand, labor force participation remained significantly below pre-pandemic levels. Labor force participation was stable in most other advanced economies. In these countries, ties between workers and firms were maintained by furlough programs. These differences and the strength of domestic demand have led to higher inflation in the U.S.