The impact of the COVID-19 pandemic on global industrial production

By Steven B. Kamin and John Kearns

The COVID-19 pandemic has triggered the sharpest downturn in the world economy since the Great Depression, with global GDP projected to decline 3.5 percent in 2020 compared to a rise of 2.8 percent in 2019. While COVID-19 was obviously the cause of this downturn, there are critical questions about how exactly the pandemic depressed economic activity: Was it mainly through lockdowns or voluntary social distancing? How did the economic effects of the pandemic differ among different economies? How large a role was played by the collapse in global trade? Our recent research aims to directly answer these questions and provide useful perspective for the recovery ahead.

Many studies address the economic effects of the pandemic using a wide range of different methodologies: production-based or computable general equilibrium (CGE) models, epidemiological models, event studies, and broader panel data analyses. But only a few of these papers (Deb et al. 2020, IMF 2020, Maloney and Taskin 2020, Furceri et al. 2021) draw on the full range of economic experiences around the world. And aside from Furceri et al. (2021), these focus mainly on daily proxies for economic activity — e.g., atmospheric emissions and cellphone-based mobility data — rather than actual production measures. 

Our paper makes a novel
contribution by analyzing the impact of pandemic variables on an actual measure
of economic activity — industrial production (IP) — over the course of 2020 and
across a wide range of economies. It is also among the first efforts to
distinguish between the role of domestic variables and global trade in
transmitting the economic effects of COVID-19.

In our research, we
estimate panel data regressions of the monthly growth in IP on several measures
of the pandemic for 58 countries between March and December 2020. The domestic
pandemic measures include deaths per 1,000 of the population and a measure of
the stringency of lockdown restrictions, the Oxford Stringency Index (OSI). All
else equal, a rise in pandemic deaths would be expected to lower IP, both by inducing
supply shortages and by prompting an increase in social distancing that leads
production to be scaled back. Similarly, an increase in lockdown restrictions
would also be expected to lower IP. Finally, a central feature of the economic
impact of the pandemic was the collapse in world trade. Even countries that
were not hard-hit by the virus itself might have suffered its economic fallout
through a decline in export demand; to measure this effect, we include
merchandise exports in our model.

We estimated this model
separately for the richest, poorest, and middle thirds of the countries in our
sample, and we found important differences in how the pandemic affected
economic activity in these groups. (See our working paper for lists of the countries
in each group.) In the charts below, we use the estimated models to decompose
the trajectory of industrial production over the course of 2020 into the
contributions of the explanatory variables.

In all three country
groups, we find that the key factor in the collapse of production last March
and April was the imposition of lockdown restrictions (the purple bars); these
accounted for 65 percent of the decline in IP in the richest countries, 79
percent in the middle countries, and 81 percent in the poorest countries. In
contrast, COVID-19 deaths (the orange bars), which are often interpreted as a
proxy for social distancing, accounted for only 19 percent of last spring’s
plunge in IP in the richest countries, and had no measurable impact at all in
the poorer countries in our sample. This result seems plausible, as poor
households are less likely to reduce their work unless lockdowns are imposed by
the government.

Figure 1: Impact
of COVID-19 on the 20 richest countries (median)

Figure 2: Impact of COVID-19 on the 18
middle-income countries (median)

Figure 3: Impact of COVID-19 on the 20 poorest
countries (median)

Our findings on the
economic effects of lockdown restrictions are not a sufficient reason for
governments to eschew such policies. To begin with, these restrictions
represent an attempt to balance economic considerations against public health
considerations; countries can and did find it desirable to restrain economic
activity in order to keep hospitals from being overwhelmed, tamp down deaths,
and prevent an explosion of infections.

Second, even in the
absence of COVID-19 deaths and lockdown restrictions within their own borders,
many countries would have been pushed into recession. Perhaps the most
distinctive finding of our study is the outsized role that international trade
has played in the transmission of the economic impact of the pandemic
throughout the world — it (the yellow bars) accounted for 21 percent of last
spring’s decline in IP in the rich countries, 20 percent in the middle-income
countries, and 24 percent in poorest countries. To be sure, the contraction in
global trade was itself the outcome of pandemic effects on the economy’s trade
partners — it thus represents the indirect effect, rather than the direct
domestic effect, of the pandemic on the economy in question. But this does not
diminish the importance of trade as a global conduit for the COVID-19
recession.

Going forward, we hope to use the models we’ve developed to assess the economic impact of COVID-19 vaccinations. As vaccinations put the economic processes we’ve documented in reverse, reducing deaths and lockdowns and thus boosting production, the central role of international trade will prove a double-edged sword. On the one hand, even though initial progress in vaccinations will be largely concentrated among the advanced economies, their recovery of income and imports will provide material support to the world’s poorest economies. On the other hand, even in the advanced economies, economic activity will not fully — and sustainably — return to normal until most of the world has the virus under control. Accordingly, aid to the world’s poorest economies, in the form of both vaccine donations and financial support, will be imperative for economic as well as ethical reasons.