With markets falling over the course of the last week, putting the S&P 500 at a two month low, it is clear that the ‘hoped for’ return to longer term ‘new normality’ is not yet quite in reach. As US deaths from COVID 19 hit 200,000, infection rates globally continue to climb steadily, particularly in Europe, with the UK government announcing the likelihood that infections would reach 50,000 per day soon unless new curbs were put in place. On Tuesday these were announced (and won’t be repeated here), but what will be the likely economic consequences of ‘second waves’ in general.
Western Governments were caught off-guard at the beginning of the first wave as the virus spread to northern Italy and then quickly to the rest of the world. Lockdowns imposed in haste were relatively blunt instruments and perhaps a bit of a ‘hammer to crack a nut’ with some unnecessary negative economic consequences. Capital Economics, an independent research house, estimate that countries that deployed lockdowns earlier this year experienced an average peak-to-trough fall in GDP of 13.5% and that the cost of fiscal support pushed up public debt ratios by an average 35% of GDP.
The authorities now know much more about the virus, how it spreads and who it affects the most, such that measures to control its spread can be more fine-tuned this second time round.
I’m sure many of us observed the first time round that, after the initial novelty and obedience to the rules had worn off, the shutting of businesses and thus denial of an ability to work, simply displaced those ‘would be workers’ into crowded parks, beaches or country walks where the disease was no more or less likely to spread. Meanwhile the cost of furlough schemes was ratcheting up and the economic waste of supply chain disruption was all too clear to see.
We think that this time the response will be better targeted and thus the economic impact less severe. It appears that continuing economic activity through the right to work (and ability to work via functioning childcare and education systems) have become more elevated in their importance than social issues. With reasonable precautions now in place in shops, offices and factories, having introduced a requirement for masks, working from home and measures to maintain distance from colleagues respectively, the new restrictions are focused on less economically damaging curbs on social gatherings such as weddings, funerals, gyms, team sports and nights out. Indeed, productivity in construction and manufacturing in the UK and Eurozone has settled 11% lower than a year ago and so there will be a reluctance to see this fall further, whereas the hospitality sector, in most countries, accounts for only 3-10% of GDP and is the biggest contributor to rising infections.
Families and businesses have also had time to consider a second wave and will have prepared for it in order to smooth its impacts. Without the shocks, financial wastage, inherent in cancelled plans and orders, can be reduced. So pre-announcements and an indication as to how long restrictions might be imposed, helps households and firms to plan and avoid waste.
To conclude, we don’t feel that the expected measures will have anything like the economic impact of those imposed in the spring and that asset prices will adjust ultimately to that likely scenario.