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The number of newly identified cases of COVID-19 has doubled over the past three months, with first Brazil and the US and then India bearing the brunt of new infections. Cases have been rising in Europe too (including in a number of countries that suffered severe outbreaks in the spring). Much more widespread testing means that identified levels of infection today cannot be compared with identified levels of infection through March and April. Nevertheless, the fact that the reproductive rate appears to have moved back above 1.0 in France, Spain and the UK, among other countries, is cause for some concern.
In previous research we found that the rate of spread of the disease in countries affected by the virus had tended on average to fall over time, for reasons unrelated to periods of lockdown. That statistical result still holds true today. As the number of people exposed to the virus in a particular location rises, we are likely to see a sustained fall in its reproductive rate, or ‘R’, both because of heterogeneity across individuals, and because the proportion of the population which remains susceptible will have fallen. But some of the fall in ‘R’ that has tended to follow severe outbreaks of the disease will have been cyclical, reflecting temporary changes in behaviour, such as more frequent handwashing and voluntary social distancing. As the chart below shows, the reproductive rate of the virus has tended to fluctuate around 1 in countries that have already suffered severe outbreaks. It might rise briefly above 1, as people begin to relax, only to fall back below 1 as people again change their behaviours in response to news that cases are on the rise. It is our hope, and our expectation, that the rate at which the virus is spreading through those countries in Europe that were worst affected in the spring will fall back in the coming weeks as people adjust their behaviours; and that this will occur without a significant increase in mortality, and without the need for further national lockdowns on the scale of those seen through spring and into the summer.
In our Global Economic and Markets Outlook for 2020 Q4, a preview of which was sent to clients earlier this week, we present a central scenario where the global economic recovery continues uninterrupted. We use high-frequency smartphone data to conclude that, on a cautious assessment, around one-half of the fall in global economic activity through the first half of this year was recovered during the third quarter. Very few major economies publish monthly estimates of GDP, but where these data are available, they point to a V-shaped recovery. Canada had made up around one-half of its lost output by June, while both Norway and the UK had done so by July.
In our judgement, the global economy is likely to return almost to pre-COVID levels of by the end of this year, but in the absence of an effective treatment or vaccine, the sectoral composition of what is produced will be very different, particularly in the major economies. Taking the UK as an example, Bank of England payments data suggest that expenditure on ‘social consumption’ — activity that typically takes place in close proximity to others — had recovered to only around 50% of normal levels by July, where it looked to have stalled. If, through a combination of reduced capacity and fear, activity fails to recover in these sectors, we estimate that the productive potential of the UK economy will be reduced by around 5% in the short term, putting around 2.5 million people out of work.
Social distancing measures put in place during the pandemic have led to profound changes in the way many of us live our lives. Some of these will be reversed in time, but others will endure. In a recent blog post, Joanna Davies highlighted the fact that only around one-third of UK office workers had returned to their usual place of work, substantially below the European average, which was closer to two-thirds. We have started to discuss with our clients the consequences that these changes will have for asset values, and for real estate in particular —both residential (where the impact will vary by region), and commercial (where the impact will vary by type). To date, industrial REITs have substantially outperformed both retail and office REITS, which makes sense to us. However, we do continue to question the relative pricing of retail and office space. Changes in the working practices of white-collar workers are making themselves felt not just in property values, but in consumer prices, as our final chart illustrates.
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