Slow, but not so steady

Until the Covid-19 virus is finally defeated, the recovery looks set to continue at an uneven pace.

To get an idea as to what has been going on in the global economy, you could do worse than glancing at the changing shopping habits of U.S. households. Since January 2020, department stores saw their sales decline by more than 5%. In the chart below, you can find them under GAFO. GAFO represents sales at stores that sell merchandise normally sold in department stores. This includes general merchandise stores, as well as certain specialized retailers.[1] So far, so unsurprising during an economic slump!

More revealingly, though, the decline was much worse in other areas. Namely at food services and drinking establishments, which mainly includes full-service restaurants, limited-service eating places, as well as bars and food-delivery services.[2] And this was, mind you, after such establishments in much of the country were able to reopen. Gasoline stations also took an unusually large hit. Meanwhile, sales at non-store retailers, such as online and mail-order businesses and shopping for hobbies, such as garden and home improvements, were up, probably boosted disproportionally by one-time stimulus payments.

This fits well with our analytic framework, which we developed at the beginning of the Covid-19 pandemic. As outlined in previous issues of this publication, we looked at the supply side of the economy on a sector–by-sector basis. Overall, our assumptions for both the loss in output for various sectors during the lockdown as well as for the duration of the lockdown were pretty close to the actual outcome for economic activity, both in the U.S. and in other countries. As a result, we feel reasonably confident in sticking with this framework.

However, we are making some adjustments. Notably, we expect the recovery to proceed in two stages. The first stage began in May and June in the Western world, and is now largely behind us. It was marked by a V-shaped bounce back, triggered by re-opening of plants, restaurants, bars and the like and supported by pent-up demand as an additional driver. This has led to some quite spectacular growth rates in German car production, for example. Over the course of the summer, however, we have already seen signs of the recovery losing some momentum. We expect it to continue, but on a much more gradual path, as businesses and their customers learn to adjust to a new normal. We expect Covid-19 to remain a drag on the economy for quite a while yet. There have been some positive signs in the development of various vaccines already, but these are unlikely to prove a game changer in the coming months.

Given the unprecedented resources devoted to Covid-19 vaccines by both the public and the private sectors, positive surprises certainly appear possible. Aside from the question whether and when an effective vaccine can be found, however, significant obstacles are likely to remain well into 2021, in ramping up production and convincing enough people to actually get vaccinated.

Indeed, premature government announcements could well prove counterproductive further down the line, by fostering suspicions among already skeptical members of the public. To make matters worse, the medical understanding of why Covid-19 lingers for months in some patients, remains quite limited.[3] One reason for this might be delayed immune responses. Against this backdrop, it would not be surprising to see a version of what crowd psychologists call the penguin effect. Penguins tend to wait for their peers to jump into the water first, before deciding it is safe. Similarly, the initial uptake of new vaccines might prove quite slow. But, the penguin effect also suggests a sudden surge in vaccinations after a while. (Once penguins decide there is no shark around and the water is safe, the laggards all tend to suddenly jump in at roughly the same time.)

More immediately, the good news is that most developed countries appear better prepared for potential renewed virus surges in the fall than they were in the spring. Most have gotten the virus under control. Testing quality and testing capacities have improved, and could, together with better contact tracing, serve as a functional equivalent of a vaccine in terms of the economic impact.[4]

The bottom line is that we do not expect a repeat of the general, nation-wide lockdowns which we saw in March, at least not for any of the world’s biggest economies. However, we do expect the counter-measures to remain in place, and any loosening to be partially reversed if and when required. This means that pandemic containment may well remain an economic drag for the foreseeable future. At best, the initial, V-shaped recovery could turn into a much flatter curve of improving economic activity.

All in all, we expect global economic output to take until 2022 before we see pre-crisis levels again. Only China is likely to be a lot quicker. The Eurozone should see a strengthening in 2021 due to grants from reconstruction funds, which we expect to support growth in hard-hit countries, notably Spain and Italy, from the second quarter of 2021 onwards.

But the U.S. estimate comes with some big caveats. The fast reopening meant that the country never really gained control over the pandemic. Due to political gridlock in Washington, some of the fiscal support has run out, damaging economic sentiment. We hope to see progress in Congress during the coming weeks, especially in critical areas such as the extension of unemployment relief and help for state and local government. Nor will the November elections necessarily end the stalemate.

A lot could still happen in the run up to the elections, including the derailment of the Democratic candidate Joe Biden, who has led the polls throughout the year. But in analyzing the economic impact of various scenarios, one needs to look beyond the race for the White House in our opinion. We expect Democrats to hold on to their majority in the House of Representatives. Much will depend on whether they can win back the Senate, too. Even such unified party control is no guarantee that Congress could act quickly to preempt further economic setbacks. Given current procedural rules in the Senate, more than a simple majority is required on most matters. In our view, there is no doubt the Federal Reserve Board (Fed) will continue to actively support the recovery, by targeting financial conditions. Inflation is no immediate threat at the moment, but that, as the Fed has been outlining, limits the potency of both its traditional and its more recent policy tools. If the recovery were to falter, Congress too would need to act. Alas, fiscal-policy paralysis remains a distinct possibility, no matter who wins the Presidency.

How U.S. shopping preferences have changed during the Covid crisis

Since January 2020, retail sales have been impacted very unevenly. Non-store retailers, such as online businesses, saw swift rises, contrasting with sharp declines in other areas.

202009_Quarterly Macro_Chart_EN_72DPI.png

* General merchandise, apparel and accessories, furniture and other sales (GAFO) represent sales at stores that sell merchandise normally sold in department stores. GAFO figures as of June 2020 (one-month lag).
Sources: Census Bureau and Haver Analytics as of 08/13/20


1. For details, see:

2. See:

3. For an excellent overview of recent research on the topic, see

4. Of particular note are efforts to supply cheap, mass produced, rapid tests to detect infectious individuals readily available for every day use at home. See:


DWS does not promote any particular outcome in the upcoming elections. This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.

DWS Investment GmbH as of 8/27/2020
CRC CRC 078026 (08/2020)

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