Because the world has had no experience of handling a major epidemic for a century, there has been a far from uniform response across the globe. Diverse public health and economic management strategies allow us learn how best to handle the epidemic and to manage the economic fallout.
In Europe, Sweden pursued a different course to its neighbours in terms of its public health regulations, with limited mandatory closures. The result has been a greater spread of the disease than in neighbouring Scandinavian countries.
However, while Sweden did not lock down its economy, it has not avoided a major recession. The OECD forecasts that GDP will fall this year by almost 7 per cent in Sweden compared with 6 per cent in Denmark and 7 per cent in Germany. Clearly, across the OECD area, the behaviour of consumers is driven at least as much by fears about the spread of the epidemic as by mandatory closures.
This has important lessons for governments in planning an exit from lockdown.
There are now major pressures from businesses that are hurting badly, such as aviation, to reopen more rapidly. However, even if there were no restrictions, people will be very cautious about returning to air travel. Thus, whatever governments do, consumers’ tourism expenditure will not return to normal this year.
This highlights the continuing importance of prudent public health measures in facilitating an economic recovery. If governments ease up too early, it could bring on a second wave of infection, something that would greatly prolong the crisis and, therefore, the cost for business.
Wise business leaders understand that preventing a second wave of infections is a top priority for everyone.
The fact that consumers’ behaviour is greatly affected by perceptions of safety means that a fiscal stimulus to encourage consumption this summer is doomed to failure. Giving households more money to spend, or reducing taxes to encourage consumption, would be a complete waste of money. Any such “stimulus” to consumers will just end up as bigger household savings.
Central Statistics Office data published on Tuesday shows that the income of 80 per cent of households has not fallen due to the crisis, while 80 per cent of people have significantly reduced their net expenditure. Thus, the predicted big rise in savings is well under way.
Ireland is not alone in the developed world in experiencing a rise in savings. In the United States, where the household savings ratio is normally 8 per cent, in April consumers saved a third of their income.
Until a vaccine is readily available, or governments manage the virus risk down to low levels, economies will not fully recover
Household income received an April boost with government transfers, while many shops and services were closed, so spending fell by almost 30 per cent – hence the big jump in savings.
While expenditure in the US on items such a groceries and clothing is returning towards more normal levels in June as restrictions have eased, there is no sign that expenditure on transportation, entertainment or eating out is recovering. In each case, after an initial bounce in early May, expenditure on those kinds of services is stabilising around 40 per cent below normal.
There has been diversity across the US in the extent to which states have locked down and the speed with which they have lifted restrictions. Digging deeper into this experience in individual states provides some interesting insights.
For example, in Alabama restrictions were greatly reduced at the end of April but, even in Alabama, consumption of key “tourism-related” services has stabilised well below normal. This confirms the fact that households’ fears about the virus are at least as important as restrictions in driving expenditure.
In the US as a whole, the change in consumption behaviour has been particularly striking among the third of households that are best off. Their consumption is stabilising at 13 per cent below normal, whereas for low-income households the reduction in expenditure and the rise in savings is much smaller.
In Washington DC, the networking and lobbying capital of the US, expenditure on eating out in early April was down 80 per cent, and today it is still down 60 per cent. The national figure today is a drop of 35 per cent.
Until a vaccine is readily available, or governments have shown that they can manage the dangers from the virus down to very low levels, economies will not fully recover.
However, once households are convinced that the danger from the virus is under control, spending the savings glut could provide a major stimulus to OECD economies, cementing a recovery without further government action.