The lockdowns imposed around the world earlier this year incurred an unprecedented global economic contraction. Still reeling from that experience, many policymakers were understandably reluctant to re-impose restrictions as subsequent waves of COVID-19 emerged.
Yet simply letting the virus run is not an option: the human cost would be devastating, the economic toll would still be immense as individuals chose to stay at home, and the evidence around potential herd immunity is far from compelling. Positive news on a vaccine is welcome, but even in a best-case scenario approval and widespread distribution is far from imminent.
The challenge is therefore to identify measures that can halt the spread of the virus today without inflicting excessive economic damage, with the optimal approach being to close only those areas of the economy associated with high infection rates.
Through October in particular, governments tried different levels of constraint to strike this difficult balance. Some used curfews, for example, and others focused on the hospitality sector.
I compared the experience across nations with different types of rules around 20 October to see what, if anything, had proved effective in reducing the ratio of positive COVID-19 tests (which accounts for an increased number of tests being administered) by early November. The chart below illustrates this analysis.
Put simply, the best place to be on this chart is in the bottom left: positive trends in containing the virus without having closed much of the economy.
Clearly, no country is there. What’s interesting to me, then, is the trio of nations – the Netherlands, Belgium, and Scotland – that managed to bring the virus under a measure of control without imposing the toughest lockdown regimes.
To me, this apparent success in these three places suggests more limited closures – concentrating on venues where people socialise like restaurants and bars, rather than shops – could be effective.
The underlying data are admittedly noisy, volatile, and cover a relatively limited sample size and period. Nevertheless, if the overall trends I show persist, they could guide officials as to the best way to contain the virus while minimising the economic cost.
This matters because while the service sector never fully reopened after March, retail sales had been getting back to their pre-crisis trends (albeit with more happening online). Closing shops now would thus have more of a negative effect on the economy than maintaining capacity limits on bars, restaurants and similar businesses.
I have focused here on Europe, but of course we will have to watch what happens next in the US. Infection rates there have been worsening, and once in office a Biden administration could look to encourage the states to increase restrictions.
Although it is still early days, we believe Europe could be at the beginning of a moderation of the virus trend while a worsening of this trend is very likely in the US. We think the market is not looking this far ahead at the moment, which provides investment opportunities for data crunchers like us.
Overall, this analysis of the recent experience in Europe certainly shouldn’t make us complacent about the necessity of steps to contain COVID-19. However, in combination with other factors like vaccine developments and encouraging flu trends, this potential to limit restrictions supports our ‘buy the dip’ neutral risk position.