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Flash PMI surveys from Europe and the US provided fodder for both the bulls and the bears. Composite readings of activity generally increased from record lows in April but remained well below 50, which is the number that separates contraction from expansion. Taken at face value, activity continued to decline in May but at a slower rate than in April. However, the way the survey is constructed makes it hard to interpret. Firms are asked a range of questions in the first half of the month, including whether activity increased or decreased versus the previous month, with a number below 50 consistent with more firms experiencing decreases than increases. This type of survey does not allow a direct assessment of the scale of any decrease. Moreover, it seems possible that firms are answering the survey by comparing activity levels to normal, thus understating potential improvements in May. Alternative high-frequency data, related to mobility, as well as a general easing in restrictions this month compared to last, suggest it is possible that economic activity will increase, albeit from historic low levels in April. That would be consistent with DG ECFIN’s survey of euro area consumer confidence, which posted a record monthly gain in May (+3.9). However, that was only enough to recover a third of April’s monthly drop (-11.1). The index remains close to record lows.
Serological data on the per cent of people that have had COVID-19 suggest that most countries are far away from even the most optimistic levels of herd immunity. Both Spain and the UK, two of the worst affected countries, have said that 5% of their population has antibodies to COVID-19. Traditional estimates of herd immunity use the natural reproductive rate of the virus (R0) to calculate the threshold for herd immunity, which is when the virus runs out of people to infect and fades away. Estimates suggest COVID-19’s R0 is 2.5. That implies a 60% threshold for herd immunity. However, recent studies suggest the effective threshold could be much lower based on heterogeneity in transmission among individuals. For example, Adam Kucharski finds that 10% of cases account for 80% of the virus spread. If that is true, the threshold could be much lower. According to Matt Hancock, 17% of Londoners have COVID-19 antibodies. That figure is close to the potential lower bound for effective herd immunity. And it is consistent with daily new cases in the UK capital falling to almost zero. However, that has come at a large human cost. There have been almost 10,000 excess deaths recorded in London since March.
With no country close to even the most optimistic levels of effective herd immunity, and no treatment or vaccines yet available, social distancing measures are likely to be required for an extended period to prevent new outbreaks. The economic outlook in the coming months will depend in large part on whether the easing of lockdowns results in an increased spread of COVID-19. There is some reason for initial confidence. In first-mover countries, such as Austria and Denmark, there is little to suggest that easing has increased new cases. Austria’s COVID-19 index of stringency score went from 85 in mid-March to 69 in mid-April, without any notable increase in infections since then. It seems possible that changes such as increased hand-washing, more rigorous isolation for confirmed cases, mask wearing, social distancing and bans on large events are enough to keep R below 1 even as measures are relaxed. That would be consistent with reduced prevalence of coronavirus within the general population. Google data show that Austrians’ visits to retail stores are 32% below normal levels. That is a big improvement from a trough of -90%, and highlights the link between health outcomes and economic activity.
While European countries have tended to reduce their daily cases to very low levels before re-opening, the same is not true of the US. Daily new cases remain elevated. Nonetheless, almost all states have announced some withdrawal of restrictions. What’s next? The US is likely to follow the path of Sweden — not suffering a big rise in cases but not supressing the virus either. Initial evidence from both suggest there has been a less severe initial hit to economic activity than elsewhere. The US composite PMI was 36.4 in May, compared to figures of 30.5 and 28.9 in the euro area and UK, respectively. However, activity remains depressed compared to normal, even in those states that have opened up. Figures from OpenTable show that restaurant visits remain extremely low but are rising in Florida, Georgia and Texas. It remains to be seen how many people will maintain private social distancing due to concern about ongoing cases. If a lot do, the result could be a more protracted period of weakness than in places that suffered sharper initial declines in economic activity but brought cases to very low levels.
The situation in Europe is improving. The situation in the US has stabilised. The situation in large emerging economies is getting worse. Global new cases have increased by around 20,000 per day over the past month. New cases in Brazil alone account for 75% of that. Other populous emerging markets (India, Mexico and Russia) are suffering large outbreaks too. At the outset of this crisis it was hard to think of a positive outlook for the emerging markets: with less fiscal space than the advanced economies, they are unable to afford extended lockdowns. At the same time, weaker public health systems mean they are unable to afford a large-scale outbreak either. That situation appears to be playing out. The Brazilian government’s non-response appears to be making the situation worse. The president has lost two health ministers in recent weeks and has pressured individual states to re-open — so far to no avail. The result has been a higher number of cases and a steeper fall in equity markets.
On a light-hearted note, McDonalds UK has reopened some of its branches for delivery and drive-thru for the first time since lockdown. I treated myself to a large Big Mac meal yesterday, helping to provide a sense of normality. It seems that I was not the only one to miss the golden arches. Long lines were reported in Sutton, as fast food enthusiasts queued up to get their hands on a burger and fries.
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