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Headlines
South Korea’s Q1 GDP data suggest that severe economic pain can be avoided by competent handling of the pandemic. The country has been widely praised for its high levels of testing and an aggressive pursuit of contact tracing, which has kept the curve of the disease relatively flat and allowed the country to avoid a full-blown lockdown, with schools being closed but most other forms of economic activity allowed to continue. Although the initial estimate will be prone to revision, and perhaps by more than the usual amount, that its economy appears to have contracted by just 1.4% in Q1 can be considered a success
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Several European countries have taken measures to ease their lockdowns this week. This is a positive development, economically and socially, and raises the possibility that the PMIs could rebound in May. However, it should be considered with some caution: further shutdowns cannot be ruled out if easing restrictions leads to a second outbreak and the easing of lockdowns does not necessarily mean that life, and economic activity, will go back to normal (even if South Korea’s figures do offer some hope).
Sweden has not been in a full lockdown at all during this pandemic, yet Citymapper’s Mobility Index shows that the number of trips planned there was less than 40% of its usual level over the last month. This may not be a robust economic indicator, but it is timely, and we suspect that it does have a strong correlation with economic activity (something that we hope to be able to test with confidence in due course). It seems that Swedes, despite not being forced to stay at home, are choosing to do so anyway.
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The number of new cases of COVID-19 in Sweden continued to rise throughout March and into April, unlike in their Scandinavian neighbours where stricter lockdown measures were enforced. But the fact that they appear to have flattened the curve, without lockdown measures, also raises hopes that the easing of restrictions in several European countries this week can be sustainable. Furthermore, while the total number of cases in Sweden is now a lot higher than in other Nordic countries, it also has a much larger population. On a per capita basis, the number of cases is only marginally higher than in Denmark and Norway, and around half as much as in Italy. With discrepancies in testing policies between countries the number of fatalities is, perhaps, a more accurate measure to compare the severity of the crisis between countries; on this front, Sweden fares a lot worse than its Nordic neighbours, but a lot better than Italy. The jury is still out on whether Sweden’s policy response was the right one.
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The crisis is starting to lead to political tensions, both domestic and geopolitical. Polling data from a selection of democracies show that in 9 out of 11 countries the approval ratings of leaders have risen during the pandemic, which would suggest that incumbents have received a boost in popularity due to this crisis. The two exceptions in this sample are the US and Brazil, where there have been criticisms of the government’s slow response to the crisis. There have widely publicised anti-lockdown protests in the US over the last week, but polls show that most voters (both Democrats and Republicans, although more Democrats than Republicans) support lockdown measures. In Brazil, the president has been at odds with his health minister (who had widespread public support and called for more stringent lockdown measures, but who has now been fired) and several state governors (who are enforcing stricter lockdowns in their states).
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Interestingly, in Sweden, support for the ruling Swedish Social Democratic Party has risen since the start of this year, despite its less stringent response. The UK has also been accused of having a slow response, yet Boris Johnson’s approval rating bounced by a lot more than that of other leaders. It is possible that these figures reflect a degree of sympathy for the prime minister since the poll was conducted by YouGov between 11 and 13 April, about a week after it was confirmed that the PM had contracted the virus. South Korea also stands out — in legislative elections last week the ruling party performed well. It is possible that it received an incumbent boost, but it is also likely that the government’s widely praised handling of the crisis is responsible for some of its success at the polls.
There is no historical polling data that we can use to extrapolate conclusions about the effect the pandemic might have on politics (there was no recorded polling data between during the last global pandemic — the 1918 Spanish flu outbreak). We have, however, picked out polling data from other more recent national crises including the Falklands War, the 9/11 terror attacks in 2001 and the 2008 financial crisis, which may offer some insight into some of the political dynamics that ought to be considered in the current pandemic.
Prime Minister Thatcher and President Bush received a boost to their popularity in the aftermath of the Falklands War and 9/11, events for which the governments were not seen as responsible and took a strong response in the national interest. President Bush, however, saw his approval ratings fall during and after the 2008 subprime crisis. It seems reasonable to conclude that incumbents receive a boost in the polls during crises, for up to a year, but only insofar as the crises were unexpected and the incumbents not to blame for the problem. And it is worth remembering that Britain’s wartime prime minister, Winston Churchill, although arguably one of the most popular leaders the country had ever had during the period of crisis, nevertheless lost to Labour’s Clement Attlee in the 1945 general election.
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The non-profit organisation Reporters Without Borders released its World Press Freedom scores for 2020 this week. We have compared this data with the Oxford University’s COVID-19 policy response data, as well as figures on case rates and fatality rates. A few things stand out: 1) there is no correlation between policy strictness and political openness, and 2) there is also no correlation between the number of cases per capita and policy response, or between the deaths per capita and policy response.
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The pandemic is also having a number of geopolitical implications, which will themselves have significant economic implications. That, however, is a topic for more detail for another time, and on another forum.
Interesting reading
Fathom forecast scenarios
Economic forecasting is difficult even at the best of times. It is particularly difficult today. At Fathom, we think in terms of scenarios and seek, wherever possible, to downplay point forecasts. A severe contraction in global economic activity through the first half of this year is inevitable – we are facing what French economist Pierre-Olivier Gourinchas has referred to as a ‘sudden stop’, something the global economy has never experienced before. But how long will it last? In our Global Economic and Markets Outlook for 2020 Q1, we set out three scenarios. The first was a V-shaped recovery, in which the number of cases peaks within months and begins to decline, allowing activity by the end of this year to return to normal levels. The second was a U-shaped recovery, where the virus continues to spread, depressing activity until a vaccine is found, but the economic and financial market infrastructure remains in place to deliver a strong rebound when that occurs. The third was an L-shaped recovery. Since we finalised our forecast on 17 March, a number of major economies have placed more severe restrictions on movement, and imposed a temporary shutdown on more industries than we had thought likely. This more aggressive action has caused us not only to anticipate an even sharper contraction in economic activity in the first few months of this year, but to increase the weight we attach to a V-shaped recovery. At the same time, we have also increased the weight we attach to our more severe risk scenario, making the outlook somewhat bimodal. In the event that COVID-19 returns with equal or greater vigour once restrictions that are holding back economic activity are lifted, then a severe financial crisis will be very hard to avoid.
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