# Impact of COVID-19 on G20 countries: analysis of economic recession using data mining approaches – Financial Innovation

#### ByOsman Taylan, Abdulaziz S. Alkabaa and Mustafa Tahsin Yılmaz

Sep 5, 2022

Table 5 lists the cluster means for different parameters. Cluster 1 includes seven countries: Argentina, Brazil, India, Indonesia, South Africa, China, and Mexico. Their mean of GDP/capita is 8,543.25, the industrial production is 4.01, and the government spending is 493,747.5. However, the death rate is the highest, indicating that these countries do not curb the influences of the COVID-19 on their economies. A direct correlation is observed between the percentage of people vaccinated per population and the number of deaths. In addition, the number of beds per 1000 people is 2.38 in the countries within this cluster, and this is the lowest rate as compared to those of the other two clusters. It can be inferred that these countries have not stopped industrial production. Specifically, the industrial production of the countries in Cluster 1 ranged from − 2.1 to 8.2. Except for Mexico, all the other countries have exhibited an economic growth in industrial production. Generally, the policymakers of the countries in Cluster 1 have focused on production stability rather than the public health, which could be affiliated with the type of the ruling regimes and its relationship to the economic activities. Moreover, it appears that the production continuation in these countries did not contribute to GDP increase, which is about < 50% than those of the other countries within Clusters 2 and 3.

As a member of Cluster 1, Indonesia has the lowest number of COVID-19 deaths; however, the highest number of deaths is in Brazil, which is also in this cluster. As one of the largest economies, China also belongs to Cluster 1, which has the lowest rate of death/COVID-19 cases but the second-highest industrial production rate of 7.3. This could be mainly ascribed to the fact that the Chinese government’s policymakers have applied innovative/expert systems and AI business automation, as well as Internet medicals and advanced technologies such as extensive data analysis, 5G, and cloud computing (Sun et al. 2021) technologies. In G20, South Africa is the only member of the African continent and has the lowest rate (0.51%) of the vaccinated population in all three clusters. According to the WHO’s infections and deaths report issued in July 2021, the most severe infections and deaths due to COVID-19 have been observed in Namibia, Uganda, Zambia, and South Africa. In contrast, India has the lowest rate (0.53) of beds per 1,000 people in the G20 countries and ($2,169) of GDP/capita. In addition, India declared that its GDP at the second quarter (in April 2021) declined by 25.8% with respect to the one at the first quarter; therefore, foreign investors withdrew an estimation of$16 billion from India. This has led to severe concerns, and it has been the worst economic recession in history (Slater 2021). Consequently, policymakers have taken steps to implement economic reform. For example, in November 2021, India’s finance minister announced a new fiscal program worth $35 billion to support industries, agriculture, and exports. Thus, economic certainty is critical; however, it does not generate sectoral heterogeneity during the pandemic. Consequently, every country has been affected differently, revealing how policymakers in these countries deal with their economic objectives. As shown in Fig. 3, Cluster 2 included the following eight countries: Australia, Canada, Italy, Deutschland, Russia, Saudi Arabia, Japan, and South Korea. This cluster depicts economically developed countries, that is, their GDP/capita is 38,182 (see Table 5); however, industrial production is negative (-2.49). The countries in Cluster 2 have lower government spending (300,647.5), death rate (0.02), and COVID-19 case rate to the population (0.018) than the other G20 countries in Clusters 1 and 3. In Cluster 2, the number of beds per 1000 people and the recovery of COVID-19/cases are 0.85 and 6.33, respectively, which are the highest rates among all clusters. In contrast, a direct negative correlation was observed between the number of beds and number of deaths. This is indicative of direct political consequences, as it shows that economic policymakers have a rationale for investing in health as an additional strategy to achieve their economic goals. Consequently, health is considered an investment that can provide economic returns rather than cost. Cluster 3 included the European Union, France, Turkey, the United Kingdom, and the United States. This cluster mainly depicts highly industrialized countries. The GDP/capita is 47,938, which is the highest among all the clusters. Except for Turkey, industrial production was negative in these countries. The average industrial production is − 2.7; however, government spending is higher (1,209,867.463) compared to the other two clusters. The only positive industrial production range was recorded in Turkey, which was 9. In this cluster, the death case rate and the number of beds per 1000 people are 0.02 and 3.75, respectively, which seem similar to the values in other clusters. A negative correlation was observed between the number of beds and deaths in Cluster 3. The number of beds in Cluster 3 was almost half that in Cluster 2; however, the number of deaths was very close to that in Cluster 2. The highest number of vaccinations per hundred people is 0.4907 and is in this cluster. The high death rate could be attributed to the fact that the elderly population rate is also high in these countries. In other words, from a policymaking point of view, shutting down industrial production did not drastically reduce or completely halt the percentage of deaths. The industrial production of these countries ranges from − 3.3 to 9. The number of COVID-19 cases/population is 0.018122, which is lower than that of the other clusters, while the recovery rate of COVID-19/cases is 0.85, which is higher than the rates in the other two clusters. Clustering is a multivariate approach to grouping investigations that share akin valuations away from several variables. A constellation diagram displays the clusters for the ideal (reference) point and the actual measured distance on the same plot. Hence, Fig. 6a shows the ideal point’s location of a constellation diagram predefined universally depending on the shared values chosen for COVID-19 economic and other remaining parameters. Constellation diagrams are helpful for graphically visualizing data to promptly identify standard variables and quantify the disparity between measured and ideal findings. The lines in the constellation diagram represent membership in a cluster. The constellation plot indicates that the three clusters have clear cut-off boundaries and shows the distance between each cluster from the remaining countries in the upper half of the plot and those in the lower half of the plot. Additionally, Li et al. (2021) found that changing social environments and the complexity of human behavior make the distribution of financial data more complex. They developed an integrated approach to detect and optimize financial data clusters and quickly interpret them based on k-means clustering algorithms. In other words, the approaches suggested by Li et al. (2021) and our approach successfully clustered the problems considered and could unravel hidden patterns. The COVID-19 pandemic-related economic crises can be portrayed by shock waves in terms of supply and demand. The pandemic has caused a profound global socio-economic crisis, with a harmful impact on financial markets, logistics systems, labor, and goods supply chains. Economic activities are restricted or ultimately concluded in many countries; hence, the economy falls into a deeper recession due to supply and demand shocks. This may ultimately lead to stagnation in economies, as described by higher price levels (revenge pricing) and unemployment rates. Remarkably, the structure and power of the negative relationship rely on several elements, such as inflation with respect to its long-dated tendency, the bottom of its extrinsic impact, and political action. The current economic situation permits analysis of the inflation, industrial production, GDP, and unemployment dynamics of countries with great alterations in economic factors, as the world started to gear toward policy intervention for economic recovery from the COVID-19 pandemic. Tables 5 and 6 list the unemployment and inflation rates in the G20 countries, except the European Union, from 2016 to 2020. Figure 7 shows the unemployment rates from 2016 to 2020, indicating that inflation has increased geometrically in Argentina and continues to increase. This trend was also observed in Turkey. The change in other countries is steady; however, a significant fluctuation in the unemployment rate appears in the United States, Brazil, France, Italy, and South Africa. It seems that inflation does not have a distractive effect on economies during 2020, which could be associated with the lockdown implemented by the G20 countries. However, the rising trend of inflation started to disrupt the economies of almost all countries during 2021 and in the first half of 2022. Owing to the long curfews, the inability of consumers to visit shopping centers freely and the delay in purchasing their needs decreased the demand for goods and services during the pandemic period. This situation has led to high volatility in economic policy. The high emission of money injected by governments to reduce the impact of unemployment also led to high inflation, which created a huge gap during post-pandemic demand as industrial production has declined, and the supply of goods and services has dwindled or nearly ceased. The economy is like a standing ship, and it takes time to regenerate and meet market needs. The demand has increased remarkably after the pandemic, which could not be met immediately, and problems arose due to logistics. This case is remarkable in the United States, which is representative of a developed country and economy, as presented in Table 2. In the United States, the GDP per capita is 55,809, which is the highest after Australia, although the government spending is 3.3 trillion$, and the industrial production is − 1.8. Moreover, the pattern of growth showed a declining trend in the pre-recession period; however, unemployment and inflation rates were low (as shown in Fig. 7).

Table 6 shows the G20 countries unemployment rates excluding the European countries. In 2020, the highest unemployment rate was observed in South Africa (28.74%). The lowest unemployment rate was found in Japan, at 2.97. Table 7 presents the inflation rates of the G20 countries. The highest inflation was observed in Argentina (42%), whereas the lowest was observed in Italy (-0.14%).

Table 8 and Fig. 8 illustrate G20 countries’ income, VAT, and corporate tax rates in percentages. Although the highest income tax was in Japan at 55.97% in 2020, unemployment was the lowest. The highest VAT was observed in Italy (22%), which has a 9.31% unemployment rate. The highest corporate tax was observed in Brazil at a rate of 34%; however, the inflation rate was low (3.21%) and unemployment was high (13.67%). Increasing productivity is crucial and plays an important role in prosperity from a policy perspective because it is the primary driver of RGDP per capita growth and shows improvement in living standards. Figure 9a, b show that the unemployment and inflation relationship is nonlinear and has an inverse relationship, reflecting a negative correlation. During the peak of the pandemic, the unemployment rate increased for almost all G20 countries; however, inflation decreased. Figure 9a, b suggest a short-run trade-off between inflation and unemployment for the G20 countries, aligned with Phillips curve theory. in contrast, as shown in Table 2, the industrial manufacturing of G20 countries has dwindled and/or almost ceased. Similarly, Fig. 10a, b show that the GDP growth depends on several factors.

The curves in Fig. 9a display concave and convex functions, respectively, which also depict dwindled or/and almost ceased RGDP rates during 2020. The concavity pattern showed that inflation was in a declining trend during the pandemic; however, the convexity of the unemployment curve showed an increasing trend in unemployment. A decrease in inflation usually leads to a considerable decrease in unemployment and an increase in the GDP rate. Consequently, unemployment can be said to have enormous societal costs, even though low inflation rates cause minor nuisances. The implications of the negative relationship between unemployment and inflation can be seen in the current monetary policies aimed at raising RGDP and minimizing unstable economic conditions in G20 countries. The monetary policy of some G20 countries is aimed at reducing unemployment; however, this may temporarily increase the inflation rate, which has occurred nowadays. The hike in the prices of crude oil and supply shocks, logistics problems, and unavailability of crucial raw materials have led to increased cost inflation, cooperating with the rising unemployment and dwindling of RGDP. However, this relationship may change in the long run when the price levels of crude oil, energy, and raw materials are adjusted. The decrease in logistics costs may also positively affect GDP in the coming years. For example, US policymakers have emphasized investing in public health and providing time-bound support to families, societies, and firms. Government financial support, if appropriately directed toward investment in industrial manufacturing, can reduce the scarcity of certain advanced products (i.e., chips and circuits) in the market. However, governments seem to focus only on reducing the effects of expanding unemployment (involving additional unemployment benefits), sending immediate stimulus payments of \$1,400 to qualified people, delivering immediate support to state and local governments, supplying resources to the vaccination program, and raising grants for academic institutions to reopen. As illustrated in Fig. 9a, b, in general, the trends provide a good understanding of the core dynamics at the system level. In France and Italy, unemployment declined; however, it showed an increasing trend in all the other G20 countries.

The inflation rates did not show an underlying variation in the G20 countries during the peak of the pandemic. However, in the post-pandemic period, very high rates were observed in the prices of goods and services. We developed the following econometric model to estimate the real GDP of the G20 countries based on Eq. 1. We also determined the standard deviation of RGDP growth in the recession periods of the G20 countries as an additional explanatory variable. Table 9 shows the coefficients of the econometric model and t-statistics ratios. Additionally, the F ratio and coefficient of determination were 9.9363 and 0.8784, respectively.

begin{aligned} RGDP_{it} & = 4021.7941 + 0.0218 GDP_{it} – 45.113 IP_{it} + 0.0045 GS_{it} \ & quad quad + 1702.66 CC_{it} – 2480.476 RT_{it} – 43598.42 DC_{it} – 83.9508 HB_{it} \ & quad quad + 2171.292 VP_{it} + exogenous;factors + mu_{it} \ end{aligned}

The econometric model indicated that endogenous factors are key indicators affecting the economies of the G20 countries, relying on the assumption that producers can expedite production in response to the COVID-19 pandemic. Hence, emerging economies with large manufacturing bases are expected to recover quickly, while weaker manufacturing-based economies are expected to suffer from long-term downward and output contraction trends. Hence, as shown in Table 5, the average industrial production growth is 4.01% for Cluster 1, including Argentina, Brazil, India, Indonesia, South Africa, China, and Mexico. Industrial production has declined by approximately − 2.49% for the countries in Cluster 2, including Australia, Canada, Italy, Deutschland, Russia, Saudi Arabia, Japan, and South Korea. Similarly, the average industrial production declined by about − 2.7% for the countries in Cluster 3, which includes the European Union, France, Turkey, the United Kingdom, and the United States. Our analysis showed that the shift in economic indicators was significantly more prominent in EU countries; the GDP rates, labor market conditions, and vaccination process were less favorable at the beginning of the crisis. Failing to develop adequate and harmonious policies causes economic deviations and risks among EU member states.

Hence, data from the first and second quarters of 2021 for GDP, unemployment, inflation, and industrial production were analyzed. With the shift in economic sentiment during the first two quarters of the year, the impact of the COVID-19 pandemic seems to be reduced; this is especially the case for unemployment-related sentiment. Following the pandemic, unemployment-related searches jumped far beyond those observed during the Great Recession. As shown in Fig. 10a, b, GDP growth depends on many factors. For instance, industrial productivity is the primary driver of prosperity and GDP per capita growth. Therefore, it is crucial from a policy perspective. The bulk of GDP per capita growth in the first and second quarters of 2021 in all G20 countries is growing; the maximum growth appears in France and Mexico, with rates of 43.9% and 36.4%, respectively. However, economic contraction and disruption still appear in Australia and Saudi Arabia, with rates of − 1.6% and − 3.9% in the second quarter of 2021, respectively. With the aging societies of EU countries in the G20, increased productivity will improve living standards and positively affect growing economies. Banerjee et al. (2020) state that the COVID-19 crisis raised uncertainty, caused a decline in corporate investment, and added a strain on corporate liquidity that might further weaken industrial productivity growth in future international trading bans, and logistic problems are not eliminated. It seems that the slowdown in industrial productivity growth is temporary and not structural.

However, announcing the slowdown implications that cause policy concerns or structural problems early. The COVID-19 pandemic might speed up the structural changes triggered and offer several challenges and opportunities for the G20 countries. Lower productivity growth, lower business dynamism, and high correlation may increase the divergence between the most and the least productive firms. The delay in the availability of relevant official statistics, long-term uncertainties in economic bias, and the impact of the COVID-19 pandemic on productivity cannot be definitively determined at this stage because of the exogenous factors presented in Table 1. Additionally, a slowdown in workers’ reorganization and government support will result in worsening of labor skills; hence, the destruction of jobs can reduce productivity in the long run.

However, emissions declined during the post-recession period, despite accelerating economic growth. COVID-19 also affected human capital growth owing to lockdown-generated disruptions in mid- and small-sized manufacturing enterprises, schooling, and training, which harmed cumulative and firm-level productivity in 2020. The G20 countries with more rigid lockdowns during 2020 experienced, on average, a more significant drop in labor market participation. Unfortunately, Fig. 11a illustrates that the unemployment problem is still in progress during the first two quarters of 2021; the highest unemployment rate appears in South Africa, Brazil, Saudi Arabia, Argentina, and Turkey at more than 10%. D’Adamo et al. (2021) claimed that although data are available only for a subset of G20 countries, the economic drop is mainly deeper for developing countries than for advanced economies due to decimated business travel and tourism and diminished movement of all stripes. Firms in advanced economies are expected to scale down investments, particularly if uncertainties regarding the COVID-19 pandemic persist. D’Adamo et al. (2021) observed that, in 2020, investment is expected to fall in all but two G20 countries, China and Turkey, compared to 2019. Comparing the effects of the COVID-19 crisis on investment with those of the global financial crisis, its influence on the G20 economies seems to be less than or comparable to that of 2009, whereas in developing market economies, it seems to be higher than average.

As seen in Fig. 11a, b, COVID-19 provides several favorable conditions to create a remarkable rate of unemployment and inflation for the periods 2020 and 2021, Q1 and Q2, around the world, especially in the G20 countries. It is crucial to point out that the post-effects of COVID-19 have been expanding exponentially worldwide, distancing global economies from potential normalization. Recently, COVID-19 data indicated a total of 211,364,677 cases, 4,423,507 deaths, 4,934,496,760 total doses administered, 1,899,999,918 fully vaccinated persons, and 188,247,177 recoveries all over the world through July 2021 (WHO 2021). Given the COVID-19 shock, the crisis is expected to leave scars, possibly through indirect mechanisms of spillover and investment declines due to hysteresis, travel bans, and fear. R&D investments are central in response to the COVID-19 pandemic to reduce unemployment and inflation rates in response to the pandemic.

In contrast, an economy’s ability to invest in innovative areas depends on country-specific characteristics including economic structure, policies, politics, institutions, and governance (Corrado et al. 2009). Looking to the future and evaluating the implications of the COVID-19 pandemic on international tax systems, many uncertainties (exogenous factors) can be observed (Baker 2020). Thus, counterplans need to be made to assess and reduce the effects of Covid-19 on economies. This may include swift and reasonably appropriate long-term plans, which may require a great deal of essential work and careful implementation, even if they are discarded or need to be significantly amended. The pandemic has had enormous and dramatically damaging economic consequences.

Moreover, the pandemic can affect prices in highly different ways; unfortunately, it has led to a considerable fall in supply and demand. For instance, policymakers in some Eurozone countries such as Belgium, Austria, and Germany adopted a VAT reduction policy that directly influenced purchase prices as another factor in reducing the economic recession and contributing to the reduction of inflation. In addition, the federal government of Germany reduced VAT by 3%, from 19 to 16% for most products and from 7 to 5%. This represented approximately 2% of the total between July and December 2020.

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