There are significant differences in how fast major advanced economies recover from COVID shocks. The US trade information shows that the U.S. GDP exceeded its pre-COVID level in the third quarter 2021, which is contrary to Japan and Europe. It could return to the pre-crisis trend in the fourth quarter. The pace of recovery in Europe was quite fast during the second and the third quarters. However, the U.S.-European GDP gap has narrowed. Two aspects are notable about the U.S.
Since so much domestic demand is for import goods, the trade deficit has been growing as import growth has been strong while exports have been contracting. Domestic spending has recovered quicker than GDP. Absolute terms, the U.S. fiscal stimulus is huge in comparison to other countries. The U.S. has been more service-oriented that other large economies, and domestic demand has shifted towards goods.
The pandemic spread quickly and global economic activity plunged in the first months 2020. China was the first to implement severe economic lockdowns. From one country to the next, the extent of the contraction during the first half 2020 was different. The UK and certain countries in the eurozone were especially affected. Japan and the U.S. suffered a moderate contraction.
G7 economies saw their GDP increase in the third quarter of 2020. The GDP growth of European countries was lower than that of the U.S. in the third quarter of 2020 and the quarter beginning in 2021, as pandemic lockdowns were put into place. The availability of vaccines was also slower in Europe than it was in the U.S. The European economies saw a strong recovery because of a faster pace for vaccinations, and less restrictions on movement or activity. While the U.S. has seen strong growth, Japan is showing signs of slowing down due to more COVID cases.
The fourth quarter of 2019 saw the U.S. GDP surpass the pre-COVID level. France is the largest country in the eurozone and has almost recovered its activity. Spain is the only country with a GDP that remains below pre-COVID levels. This is due to the severe effects of the pandemic and subsequent collapse of tourism.
Many smaller, advanced European economies such as Austria and Belgium in the eurozone and Finland in Sweden have achieved their pre-COVID GDP levels. These countries were less affected by the most affected service sectors. Similar results are also true for smaller, more advanced economies in Asia. Taiwan, a manufacturing giant, has performed exceptionally well, with its third quarter GDP surpassing its 2019 level of 7 percent.
The U.S. GDP is closer to the pre-COVID trend than other advanced economies. US customs data shows how comparing GDP levels underestimates the impact of the crisis. The economies would have grown without the pandemic in 2020-21. We compare the GDP at the end of the third quarter 2021 with its pre-crisis trend. This metric shows that the pre-COVID trend in economic activity has not been reached by all G7 countries, as well as Spain. Current projections indicate that the U.S. would reach its pre-COVID trend in the fourth quarter 2021. In 2022, most other countries will follow the U.S. example. Uncertainty has been raised by the emergence of a fourth-wave infection and a new variant of the omicron omicron. This is especially true during winter months in Northern Hemisphere.
U.S. U.S. Consumption growing faster than GDP
Because of the substantial increase in domestic consumer spending, the U.S. recovery has been more impressive than any other advanced economies. The global pandemic reduced the demand for contact-intensive services. The U.S. saw a decline in services consumption by 1 1/2% compared to pre-pandemic levels, while the consumption of goods increased by 15%. Despite a sharp decline in vehicle sales, durable goods consumption increased by more than 20% in the third quarter. Also, the U.S. was facing labor shortages. Despite high labor demand, the U.S. labor force participation was still significantly lower than pre-pandemic levels. In most advanced economies, labor force participation was stable. Furlough programs were used to maintain ties between workers in these countries and their firms. Inflation in the United States has been higher due to these differences and strong domestic demand.