Many European countries have started easing the lockdowns they imposed in March to contain the spread of Covid-19. Last night UK prime minister Boris Johnson laid out what he described as a “conditional plan” for the gradual easing of the UK’s lockdown.
This phase will be more complex than the full lockdown. The authorities face a difficult balance as they seek to contain the virus, restart the economy and maintain public confidence.
A popular blog post by Tomas Pueyo referred to “the hammer and the dance” of containing COVID-19, the “hammer” referring to the lockdown to counter the first wave of infections and the “dance” to the delicate process of easing and possibly reimposing restrictions to manage further waves of the virus.
The latest Covid-19 study published by Imperial College illustrates how perilous the “dance” phase will be. The study finds that in Italy even a 20% increase in mobility from lockdown levels would lead to a “resurgence of the epidemic with more deaths than the current wave” in the absence of additional interventions like contact-tracing.
All countries, even those with exemplary records in countering the virus, face this challenge. Over the weekend Germany’s Robert Koch Institute reported that the country’s R nought (reproduction number) had risen above one for two consecutive days. South Korea’s president Moon Jae-in warned on Sunday of the risk of a second wave later this year as the number of recorded cases rose to a one-month high.
GDP growth will pick up as sectors slowly reopen and pent-up demand is released. But lost ground will not quickly be regained. European countries are easing in different ways, but all are doing so cautiously and are maintaining social distancing requirements. As the prime minister made clear last night, the easing of the UK lockdown will be gradual and will depend on suppressing the virus. From this week UK manufacturing and construction, which account for about 16% of GDP, will be actively encouraged to return to work.
As activity restarts firms will face the challenge of rising costs and revenues that may be lagging, sub-par or patchy. The Bank for International Settlements finds that historically firms struggle to cut operating costs at the same rate as revenues decline, putting pressure on margins. It estimates that following a 10% fall in revenues operating expenses decline by just 6%.
As economies reopen, firms will need to determine their ability to operate with capacity limited by social distancing. Keeping customers and staff two metres apart could challenge the viability of many sectors, such as air and rail transport and restaurants and bars.
A recent report in The Guardian report cited a source in the UK rail industry as saying that to maintain social distancing trains would need to run 80% empty. Ryanair’s chief executive has said that leaving middle seats on his planes empty to respect social distancing would leave the firm’s business model in tatters. Amazon, whose share price has risen over 40% since early March, reported a 26% rise in first quarter revenues. But COVID-19-related costs, on PPE, cleaning, distancing and wages, have squeezed margins, leading to a 29% drop in profits.
Many firms will have taken on additional debt during the lockdown and face new costs in the easing phase. They will also contend with the moral and potential legal implications of their responsibility for the health of their workers and clients. Some retail and food businesses have refrained from reopening over uncertainties around customer safety.
The ease of returning to work will vary significantly by sector. Some sectors, like construction, which in the UK was not required to shut down, may find it easier to resume operations with social distancing. Real estate may be able to recover substantial activity with remote working and virtual viewings. The prime minister said last night that some of the hospitality industry might be able to reopen from July – at the earliest, if they are able to enforce social distancing and subject to progress in containing the virus.
The post-lockdown recovery will depend not just on which restrictions are lifted, but also on the behaviour of households. Sweden never formally imposed lockdown restrictions but consumption is nevertheless sharply down from normal levels. Its economy is forecast to contract by 6.0% this year, a similar rate to many other European economies.
A YouGov survey found that a majority of Britons would be uncomfortable visiting restaurants, cafes, pubs and gyms when they reopen. After ending its lockdown, China has managed to return to work in many sectors, but leisure activity remains subdued. The same holds true for US states which have eased their lockdowns.
The pattern of economic activity will be changed by the crisis. The return to pre-COVID-19 levels of activity in some sectors will be slow, or may never happen. The longer the disruption to business lasts, the less tenable it may be for governments to preserve all worker-employer linkages via furlough or short-work schemes.
The Institute for Fiscal Studies has called for the government to actively intervene in labour markets to help workers whose jobs are unlikely to be available in the near future. In supporting firms, the use of debt finance will become more challenging the longer revenues lag. This has prompted calls for governments and banks to shift towards buying equity.
The virus has peaked in many countries and we are moving into a conditional phase of easing. The challenges for government and business are becoming more complex. Radical policies, and a remarkable public response, have helped us through the last seven weeks. More of both will be needed as we move into the next phase.
