Stockholm (Ekonamik) – As the discourse in many countries has shifted towards taking steps to ease the lock-down restrictions implemented during March to contain the spread of COVID19, we consider the state of play of the spread of COVID19 and lays behind the recent decisions.*
COVID19 Spread Update
The month of April was dominated by the spread of the Coronavirus to the Americas, particularly the USA, which has now become the main geographical focus of the pandemic.
Source: ECDC (15/05/2020)
However, and notwithstanding the various measurement issues plaguing how this epidemic is being tracked, despite the high figures, the case-to-fatality ratio in the USA (6.1%) is not the worst in the world. While it is worst than the one in most of Scandinavia, for example, it is however not as bad as the one in Sweden (12.3%). The figures for Denmark, Finland and Norway are 4.7%, 4.9% and 2.8%, respectively. The outlier status of Sweden is not surprising considering the country has the least intrusive policies to manage the crisis and has not implemented a full lock-down.
On a positive note, and bearing in mind the aforementioned caveats about data issues, Portugal (4.2%) and Greece (5.6%) seem to offer a bright spot among southern European countries, whose reputation for low state capacity had previously been the dominant narrative of the sovereign debt crisis. Sadly, the same cannot be said for Spain (11.9%) and Italy (14.1%), which have come to be associated with the exponential growth of the virus. Perhaps more disruptive of stereotypes, it is actually rich European countries (Belgium, France, UK, the Netherlands) that we find the highest case-to-fatality ratios. Germany, on the other hand, appears to have met expectations with a ratio of 4.5%.
Nevertheless, given the disproportionate role that the USA plays in the global economy, the effects felt across the Atlantic will multiply as they spread across the globe.
Forecasted Economic Effect
In its April 2020 World Economic Outlook update, the IMF appears to forecast “V” shaped recession for the global economy, which it predicts will contract by 3% in 2020, only to rise again by 5.8% in 2021. In the USA, the IMF foresees a contraction of 5.9%, followed by a 4.5% increase in GDP in 2021. In the Euro Area, the recession is forecasted to do more permanent damage, with a contraction of 7.9% in 2020 being followed by 4.7% growth in 2021. UK economic growth was poised to fall by 6.5% in 2020 only to rise again by 4% in 2021.
However, these figures should be taken with an even more generous pinch of salt than usual when dealing with macroeconomic forecasts. As the epidemic evolves, the landscape of predictions is evolving and not necessarily for the better. The OECD‘s Interim Economic Outlook Forecasts published at the start of March still projected global growth of 2.4% for 2020. Similar optimism could also be found in the ECB’s Staff Macroeconomic Projections published in March, which expected the currency union’s economy to slow down from a rate of 1.2% growth in 2019 to a rate of 0.8% in 2020. Moreover, at the start of May, the BoE was warning against a 14% contraction in GDP this year, over twice as much as the IMF prediction. Following early estimates of GDP growth at the end of April showing 3.8% and 3.5% quarterly contractions in Euro area and EU GDP, Eurostat has now released estimates of industrial production that show contractions of 11.3% and 10.4% in March alone, respectively.
Why lift restrictions now?
There appear to be two main logics driving the discourse around lifting lock-down measures. From a public healthcare perspective, the main reason seems to be the fact that the lock-down measures appear to have been able to flatten the curve.
The other motivation for lifting lock-downs is economic. Although our economies have made enormous strides towards improving their efficiency over the last fifty years, resilient they are not. As a result, some have expressed concerns that the lock-down measures will not just undermine the livelihood of people, but rather that the longer they last, the more likely they are to increase poverty levels, which could ultimately undermine political stability. According to the European Anti-Poverty Network (EAPN), there were 110 million people at risk of poverty or social exclusion in the EU, equivalent to 21.9% of the bloc’s population. Moreover, Eurostat estimates that 2.3% of the Union’s population was employed in precarious conditions.
Although governments have deployed large fiscal packages supported by substantial central bank debt purchases, these can only last so long before the lack of actual economic production causes the price of consumer goods to rise. While we appear to still be rather far away from such dreadful times, it is nevertheless understandable that governments continue to weigh these trade-offs. Naturally, the danger is that a premature end to the lock-downs will cause a second wave of cases and bring about a new series of lock-downs, further postponing the economic recovery. The only certainty is that COVID19 does not offer simple or good choices, only risks.
*We would like to note that none of us at Ekonamik are epidemiologist, nor specialists in that specific field. Other authors ave provided summaries of the epidemiology and economic implications of the COVID19 virus, which we have found helpful.