Coronavirus & the small economy model
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Small advanced economies have prospered over the past few decades in an era of global growth and intense globalisation. But the global economy is undergoing its sharpest contraction since the Great Depression, and structural pressures on globalisation and geopolitical stability are rising. For small advanced economies that are deeply exposed to the global economic and political context, this is a challenging context.
Even prior to Coronavirus, arguments were made that the golden age for small economies was over because of challenges to the open, rules-based global system. And during the global financial crisis arguments were made that small economies could not effectively manage large economic shocks.
But these arguments have been much exaggerated, as I have noted previously. And the Coronavirus experience provides another reminder of the underlying resilience of small advanced economies despite their obvious exposures.
In terms of public health, many small economies have performed well in controlling the spread of Covid-19, led by economies such as New Zealand and Taiwan. On a per capita basis, most small economies have relatively low rates of reported cases and deaths. And small economies like Singapore and Sweden that experienced a surge in cases have seen strong declines over the past several weeks. Strong political leadership, coupled with effective public sector institutions and social capital, contributed to these good outcomes. The contrast with several large economies, notably the US, the UK, and Spain, is marked.
This performance has allowed for restrictions to be relaxed within countries and at the border, supporting the resumption of economic activity. This higher risk profile contributed to the second wave of cases in many advanced economies over the past several weeks. However, this has also been managed reasonably effectively in small economies; for the most part, the recent peak in cases has been well under what was seen in March and April.
There is not a direct relationship between domestic success in controlling Covid-19 and economic outcomes in small advanced economies, because exposure to international markets has a meaningful impact on economic performance. For example, Sweden had liberal lockdown measures, a relatively high number of cases, and still experienced a marked economic contraction; whereas New Zealand had a very stringent lockdown, fully eliminated domestic spread for a time, but is also experiencing a sharp slowdown partly because of the loss of all international tourism and migration. But in general, success in controlling the domestic spread of Covid-19, which supports economic reopening, is an economic positive. And small economies have deployed their fiscal and monetary policy tools effectively.
This can be seen in Q2 GDP data, which is now out for most advanced economies. There is significant variation across these advanced economies, but in general it is the large economies that experienced the larger GDP contractions in Q2 – led by the UK (-20% qoq) and Spain (-18% qoq). France, Italy, Canada, and Germany also experienced contractions of ~10% or more. In contrast, the average across the small economy group was a contraction of just under 10%. Singapore, Austria, and Belgium experienced sharp contractions of 10-13% qoq, due to a combination of the domestic lockdown costs and weaker external demand. But the Nordics, the Netherlands, and Switzerland were markedly more resilient, with quarterly GDP contractions in the 5-8% range.
Extending this analysis to look at the combined experience of Q1 and Q2 does not alter this picture in any meaningful way. Small economies have the edge in the first half of 2020. There is no sense from this data that large economies have an intrinsic advantage in managing through the substantial economic shock.
It is also striking that small economy export growth is holding up significantly better than for advanced economies overall. This partly reflects strong positions of competitive advantage that small economies have developed, but more importantly the sectoral mix of exports in several small economies (pharmaceuticals, electronics, food). This has acted to offset the sharp decline in international tourism, which is significant in many small economies.
The global economic recovery will take time, and there is much uncertainty with respect to the outlook. But so far, small advanced economies are navigating this crisis well. The small economy model remains intact even in deeply challenging circumstances.
Warren Buffet famously said not to bet against America. This advice may be better framed as not to bet against small economies. Small economies are not simply passive recipients of shocks to the global system: their social and political institutions and the quality of their policy responses provide them with an edge. Agility and responsiveness matter particularly in times of disruptive change. There is a long way to go, and small economies will need to navigate the many structural dynamics generated by Covid-19. But there is reason for confidence in the outlook for small advanced economies.
Dr David Skilling
Director, Landfall Strategy Group
www.landfallstrategy.com
www.twitter.com/dskilling