Key Points

  • The most widely used measure of economic activity, gross domestic product (GDP), will soon be released for the first quarter by different countries.

  • First quarter GDP in most major countries may decline about 6%, due to business closures for about 15% of the quarter, assuming GDP fell 40% during the shutdown.

  • Second quarter GDP reports may benefit from any return of economic activity as well as monetary and fiscal stimulus.

The most widely used measure of economic activity, gross domestic product (GDP), will soon be released for the first quarter by different countries. China reports at the end of this week with other major countries posting their numbers by months’ end. What will these reports tell us about the world economy for the first quarter, when the economic freefall began? What do they foreshadow for the second quarter?

What to expect: first quarter GDP

The largest declines in GDP will likely be in those countries that faced business restrictions and shut down for a longer duration during the quarter. China’s shutdowns were centered in the first quarter, beginning with the lunar new year on January 25 and not restarting until about two weeks after the peak in new COVID-19 cases (early February), though with some areas remaining restricted through the end of the quarter. As a result, we expect this week’s first quarter GDP report for China to show a double-digit percentage decline from the fourth quarter of 2019. European countries may see a milder slowdown in the first quarter, since their shutdowns to contain the spread of the virus were enacted later in the first quarter, as you can see in the chart below.

Number of days economic activity was restricted during the first quarter

Source: Charles Schwab, various news sources as of 4/11/20.

To get a sense of how markets may react to the GDP data, we have made a very rough estimate of what the first quarter GDP impact may be, using it as a baseline for what to expect. All major components of GDP were likely affected negatively: consumer spending, business spending, trade, with some positive offsets from greater government expenditures. Although the GDP in these 10 major countries vary, the relative size of the components of GDP in these countries is somewhat consistent.

Looking at the duration of the restrictions and shutdown, we can assume that China’s decline in GDP is likely to be several times that of many European countries in the first quarter. Most major countries in the chart above saw economic restrictions for 11 to 18 days of the 91 day quarter (or about 15% of the quarter). This may mean that if GDP falls a rough estimate of 40% during the shutdown, then the change in first quarter GDP might be an approximate decline of 6% (15% of 40 percentage points).

Although economic indicators continued to show growth through February for most of these economies, supply chain disruptions and other factors may have impacted economic growth prior to any restrictions and shutdowns—especially in countries that didn’t enact restrictions like Japan or South Korea. Additionally, some countries report quarterly changes in GDP on an annualized basis (like the United States), which would make a 6% fall for the quarter be reported as a 24% crash.