IEEJ：August 2020

©IEEJ 2020

Special Bulletin
A Japanese Perspective on the International Energy Landscape (494)

August 21, 2020

Developed Economies Record Sharpest Postwar Contractions in Q2 2020
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe COVID-19 pandemic is still expanding throughout the world, without any sign of anend. As of August 20, the global COVID-19 infection toll stood at 22.26 million, with the death toll
at 0.78 million, according the World Health Organization. Among regions, the Americas posted thelargest infection toll at 11.89 million, followed by 3.87 million in Europe, indicating that thepandemic is serious particularly in the United States, Europe and South America. By country, theUnited States recorded the highest infection toll at 5.43 million, followed by 3.41 million in Brazil.
Following the two largest countries in the Americas were India (2.84 million), Russia (0.94 million),
South Africa (0.6 million), Peru (0.55 million), Mexico (0.53 million), Colombia (0.49 million),
Chile (0.39 million) and Spain (0.37 million). Originating from the outbreak in China, the pandemic
has brought about great damage in Europe and the United States and expanded to the rest of theworld.
In the face of the rapid COVID-19 expansion, major Western countries suppressed
economic activities and restricted human and goods traffic through such powerful means as
lockdowns to prevent expansion of infection. Japan declared a state of emergency, asking citizens tovoluntarily restrict traffic and economic activities, though without compulsory lockdowns. AroundMay, many countries concluded that the infection expansion had peaked out while failing to end,
gradually reopening businesses and easing or lifting traffic restrictions. The most important matter inmany countries at present is how to balance economic activities with prevention of COVID-19expansion. However, powerful economic suppression and restrictions on human and goods traffic
implemented until May had grave impacts, as shown by economic indicators published one after
another in major countries.
In Japan, the Cabinet Office in its preliminary report on August 17 stated that the nation’s
real gross domestic product in the second quarter of this year contracted 7.8% from the previousquarter. The annualized contraction was given at 27.8%, representing the steepest postwar economicplunge, surpassing 17.8% in the first quarter of 2009 after the September 2008 failure of Lehman
Brothers. The preliminary report showed that private consumption accounting for a majority of GDP
posted an 8.2% decline. Net exports dropped 18.5% and nonresidential private investment decreased
1.5%. Both domestic and external demand collapsed, indicating that the COVID-19 pandemic
exerted immense impacts on economy, society and civic life.
However, European and U.S. GDP contractions were even steeper than that in Japan. The
annualized GDP contraction came to 32.9% in the United States, 40.3% for the eurozone including
Germany and France and 59.8% in the United Kingdom, against 27.8% in Japan. Those economic
contractions were unprecedentedly sharp. Many Western countries saw remarkably rapid expansion
in COVID-19 infection and death tolls and critically ill people and implemented lockdowns known
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©IEEJ 2020as far more powerful economic restrictions than in Japan, suppressing economic and social activities.
This apparently contributed to their steep economic contractions. As Japanese, European and U.S.
economies shrank substantially, the global economy deteriorated further. China posted the first everquarterly negative economic growth in the first quarter of this year when the outbreak expanded, but
it recorded positive growth in the second quarter by successfully containing the outbreak in the earlystage. In any country, future economic growth would depend on whether the pandemic would be
successfully contained or whether the containment would be sustained.
The annualized economic contractions such as 27.8% in Japan and 32.9% in the UnitedStates looked remarkable in media, leading some people to misunderstand that Japanese and U.S.
economies in 2020 would shrink 20-30% from the previous year. The annualized contraction rates
assume that the quarter-to-quarter contraction would remain unchanged over four quarters. If an 8%
quarter-to-quarter contraction continues over four quarters including the first one, for example, GDPwould be 92% of the previous quarter’s level in the first quarter, 84.6% in the second quarter, 77.9%
in the third quarter and 71.6% in the fourth quarter, resulting in an annual contraction at 28.4%. The
28.4% is the annualized rate. Many Japanese, European and U.S. economies in the third quarter ofthis year are expected to post positive growth rates in reaction to substantial contractions in thesecond quarter. In this sense, economic contractions in 2020 would be far milder than the annualizedrates for the second half.
Anyway, however, Japanese, European and U.S. economies in 2020 will shrink from theprevious year. In its World Economic Outlook released in June, the International Monetary Fund
forecast that the global economy in 2020 would contract 4.9% and that the economy would shrink
8.0% in the United States, 10.2% in the eurozone and 5.8% in Japan. Actual economic conditions
indicate that economic contractions could be greater than forecast by the IMF. While the IMF
expects that the global economy would grow 5.4% in a V-shaped recovery in 2021, the current
pandemic status and future uncertainties lead me to view the possibility of IMF forecast as
considerably optimistic.
Pessimistic analysts cite a U-shaped or slow one, an L-shaped one including a prolonged
recession and a K-shaped one in which economic growth would be patchy in the world. In suchsituation, each country is endeavoring to devise how best to balance economic growth withprevention of the pandemic’s expansion.
Ahead of the U.S. presidential election attracting global attention, a recovery from theCOVID-19 disaster and economic issues are the biggest matter of interest to U.S. voters. Whether
Donald Trump or Joe Biden wins the election, economic recovery measures would be the biggest
challenge for the next U.S. administration. In the European Union led by European Commission
President Ursula von der Leyen, a recovery from grave economic and social damage is the largest
urgent challenge. It is taking advantage of the European “Green Deal” for the recovery. In Japan aswell, recovery from the COVID-19 disaster is the largest challenge involving civic life. In any
country, the success or failure of the recovery from the disaster would be directly linked to economic,
social and political stability. We will have to closely watch relevant future developments.
The largest postwar economic contractions in the second quarter of this year have exerted
great influence on international energy markets. Final consumption crashed for all energy goods
including oil, gas/LNG, coal and electricity, leading to oversupply and weaker prices that have2

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©IEEJ 2020

squeezed the energy industry and caused cost and investment cuts. From the third quarter and on, thefate of the pandemic will continue to exert influence on the global economy and the internationalenergy situation.

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