Several European countries have implemented second lockdowns in response to a dramatic increase in COVID-19 cases. Over the past week Belgium, France, Germany and England have introduced national lockdowns. The restrictions are generally less severe than those imposed in the spring, with schools remaining open, and are time-limited to shut down sectors of the economy for four to six weeks. The impact of these measures on virus transmission and economic activity remains to been seen, though there are indications from early lockdown case studies.
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GDP data for Q3 are now available for close to one half of the global economy. The recovery through to September is looking to have been more rapid than Fathom had estimated in their central largely V-shaped scenario. With fresh lockdowns coming into force, it now seems inevitable that European economic growth will be weaker in Q4 than had been assumed. But how much weaker?
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Evidence of the impact of a second national lockdown on case numbers is promising. Israel was first to impose national restrictions, entering a month of lockdown from 18 September. Ireland followed, beginning a six-week period of national lockdown on 21 October. The renewed lockdowns in these two countries have proved extremely effective in bringing down the number of identified cases of COVID-19. Fathom estimates that in Israel the reproductive rate of the virus, ‘R’, fell to around 0.5. In Ireland, where the schools remained open in contrast to Israel, ‘R’ looks to be closer to 0.7. ‘R’ is dependent on human behaviours, which are in turn driven by public confidence in measures being taken, as well as on biological factors such as the level of immunity in a population.
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If the renewed lockdowns we are seeing across Europe are as successful in bringing down ‘R’ as those seen elsewhere, then it is possible that four to six weeks of restrictions may be enough. Projections for the seven-day rate of infections for each region of England suggest so, making the assumption that ‘R’ falls to 0.7 from the start of lockdown in each case. On that basis, much of southern England would drop below 20 cases per 100,000 people, per week, by the beginning of December. London would be a week behind, and parts of northern England up to three weeks behind. This is a rate of infection with which the UK government seems comfortable. If correct, the national lockdown will probably come to an end on 2 December as planned, though with some regions continuing to face more restrictions than others.
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How will these renewed national lockdowns affect economic activity? There are grounds to believe they will have a smaller impact the second time around than in the spring. Firstly, in almost all cases the restrictions are less severe, with schools remaining open. Secondly, and perhaps more importantly, we have learnt more about the virus and are more prepared, which ought to mitigate the economic impact still further. On the demand side, we know more about the modes of transmission than we did in the spring, so people are likely to be less fearful about leaving the house to visit the businesses that remain open. And there is less uncertainty, with fiscal support measures tending to be in place before the lockdowns were enacted, and with a vaccine seemingly just around the corner. On the supply side, businesses have adapted, with those that are allowed to open having already made themselves COVID-secure. Many of those that are not, particularly in the hospitality sector, will already have established an online presence, offering delivery or takeaway options. Google mobility data for Israel and Ireland show that time spent in the workplace, a proxy for the impact on supply, fell by only one quarter to one half as much as in the first lockdown. Therefore, a cautious estimate would suggest that the second lockdowns will reduce activity by only half as much as in the spring.
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In financial markets, increased nervousness on the part of investors is evident in the VIX measure of equity market volatility, which has risen sharply since mid-October. Nevertheless, this so-called ‘fear gauge’ remains substantially below levels seen in March. Proprietary metrics tell a similar story. Fathom’s Risk Off Gauge, the FROG, has jumped back into uncertain territory, from a position back in early October were investors were decisively ‘risk on’. Finally, the FLiq, Fathom’s measure of market liquidity based on the discount earned on closed-end funds, showed a further fall in liquidity last month. Uncertainty about the outcome of the US election is also impacting investor sentiment, with assets exposed to a shortage of liquidity likely to suffer in the near-term.
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