Fathom’s Recovery Watch 27.05.2020

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Headlines

• Autocracies appear to have suffered the same behavioural stickiness as democracies, with the movement of people in response to stringency measures just as a varied
• Despite the risk of a second wave, advanced economies that have relaxed lockdown restrictions significantly since end March have avoided a resurgence in cases so far
• Travel appears to be regaining popularity, albeit slowly, with worldwide flight traffic creeping back up, much to the relief of hard-hit airlines
• According to France’s National Bureau of Statistics (INSEE), the French economy is now operating a mere 20% below capacity

Several weeks ago, we identified that the movement of people was better at explaining the variation in Q1 economic output than official lockdown measures. In other words, that what people do matters more than what they are told to do. That ‘stickiness’ between what people are told to do and what they actually do is illustrated in the chart below, with outliers, as measured relative to the trend line, highlighted accordingly. Those below are more responsive to domestic stringency measures than the trend would suggest, and vice versa.

In countries like Nicaragua, whose official policy response to the spread of the virus has been the least stringent of all those monitored by the University of Oxford’s tracker, another factor, such as fear, is clearly at play, supressing the movement of people beyond that implied by the policy response alone. At the opposite end of the spectrum, and sat above the line, is South Korea, perhaps a consequence of preventative measures, such as masks and contract tracing, encouraging the more normal movement of people despite lockdown measures still being place.

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Arguably, neither form of behavioural ‘stickiness’ is ideal for policymakers. But with the worst now over and restrictions being eased, a key takeaway is that those materially below the line may well have a tougher time kickstarting the economy than those above it.^[1] Autocracies^[2] appear to have suffered the same ‘stickiness’ as democracies, as highlighted by green dots being both above and below the trend line and a similar R² of 43%.

Encouragingly, the advanced economies that have relaxed lockdown restrictions the most since end March, as defined by the University of Oxford’s Government Response Tracker and shown in the chart below, do not appear to have suffered a resurgence in cases, with levels below or close to those seen back then. However, with herd immunity some way off (as explained here), and no vaccine yet available, social distancing measures are likely to be required for an extended period to prevent new outbreaks, emphasising the importance of good governance in shaping behaviour.

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The UK policy response has been repeatedly wide of the mark in that respect. Consequently, the daily COVID-19 death toll as a proportion of the population is higher in the UK than elsewhere, with the exception of Sweden. That is despite the UK suffering a much larger contraction in economic activity as restrictions in movement saw the economy grind to a halt. Sweden’s approach has been much less aggressive, with many fewer restrictions in place. Survey data out this week suggest that confidence in the UK government has collapsed. To the extent that this might feed through into fewer people actually following the rules, the UK could see itself shifting from being below the trend line in the first chart to being above it.

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Nevertheless, the UK government has continued to relax restrictions, with outdoor markets and car showrooms set to reopen at the start of June, followed by non-essential stores two weeks later. Already, the number of vehicles on the road has begun to normalise, as shown below. Both rail and tube use remain stubbornly low, perhaps due to the difficultly of maintaining social distancing.

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Travel appears to be regaining popularity elsewhere too, with the number of flights tracked by website Flightradar24 creeping back up from its mid-April low, no doubt to the relief of hard-hit airlines. Germany’s plans to further lift restrictions, allowing its citizens to travel in Europe from 15 June, saw shares in European travel companies rally earlier this week. The announcement comes on the back of further financial aid for the struggling industry.

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Last, but not least, according to France’s National Bureau of Statistics (INSEE), the French economy is now operating a mere 20% below capacity. That compares to -35% during the height of the lockdown as consumption ebbed.

[1]. Pictures of Italy in recent weeks might suggest otherwise, with bars and cafes bustling with people

[2]. Using the Polity IV definition and displaying all countries for which data are available.

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