FRANKFURT (Reuters) - Europe’s second coronavirus lockdown is less strict and disruptive than the one seen in spring, at least for now.
This should translate into a less severe hit to economic growth, although long-terms costs are accumulating.
The following compares the two lockdowns and their effect on regular life, business activity, employment and corporate zombification.
Mortality rates have dropped compared to the spring but infection numbers are two to three times as high in many countries, pushing health systems to their limits.
In Germany, intensive care utilization, including for non-coronavirus infections, is now 15 percentage points higher than in mid-April, with occupancy rates at 72% nationally and around 85% in Berlin, according to government data.
In countries like France, the UK and Belgium, which suffered a more severe first wave, ICU occupancy rates are still below their spring levels but are rapidly rising.
The implication, analysts say, is that restrictions will have to remain in place much longer than in the spring and possibly until a vaccine is available.
A dip back into recession now appears inevitable, economists say, but the drop in GDP is unlikely to be as severe as in the spring for two key reasons.
The restrictions on business activity are not as onerous for now as in the spring, and economic output is still far below pre-crisis levels, meaning that low base figures will in part obscure the severity of the hit.
Early estimates suggest that GDP in Germany will contract 1% to 2% this quarter, while in France the hit could be 3% to 4%. Estimates for the UK are in a wider 1.5% to 5.5% range, compounded by the risk of a no-deal Brexit. For comparison, euro zone GDP fell by 12% in the second quarter.
France and Britain are entering near complete lockdowns, while Germany is taking a softer approach and others are opting for even easier controls. Still, overall the measures are seen as more nuanced and less invasive.
The key difference is that schools remain open and firms in construction and manufacturing can operate with relative ease.
The huge disruption in supply chains experienced this spring is also unlikely to be repeated as firms have learned to cope.
So far, people appear to be taking the second wave with ease. Google data on retail and recreation show mobility 15% to 30% below the baseline compared with an over 80% drop in April. Congestion data by TomTom appears to show normal or even above-average traffic in cities like London and Berlin on Monday, but traffic in Paris, Brussels and Madrid is below average.
Germany will allow most retail outlets to stay open, while Britain and France will force non-essential retail to close. Restaurants, bars and places for leisure and entertainment will be mostly closed.
Unlike in the spring, the measures are mostly for one month, implying that governments are willing to consider easing in the run-up to Christmas. That could be vital to retailers. But travel and tourism will enjoy little to no benefit.
Fiscal support is already in place with budget deficits well over 10% of GDP in the euro zone, while borrowing could hit 20% in the UK. Public guarantees and job protection schemes, cobbled together quickly in some cases this spring to avoid mass unemployment, have mostly been extended, avoiding a cliff edge scenario for firms. France and Germany both announced further support measures along with the restrictions.
But there are limits to spending. Public debt has soared above 100% of GDP and some governments are discussing targeting subsidies, saving only firms perceived to be viable in a post-COVID-19 environment.
The problem is that firms deemed non-viable, or “zombies”, merely stay alive a bit longer because they can borrow at close to no cost. But they produce no productivity growth and take capital away from others.
For now, banks keep such zombies alive to make their balance sheets appear stronger. Loan impairments have barely ticked up this year as public guarantees allow banks to keep loans on their books.
Once state aid is curbed, a slew of firms could quickly close, pushing up unemployment.
The lowest-paid workers are more than twice as likely to work in locked-down sectors. They also have below-average education and lower savings. Permanently losing employment would widen income inequality further, because employment is taking longer and longer to rebound after recessions. Following Europe’s debt crisis a decade ago, it took employment close to five years longer than GDP to rebound.
Ironically, the second wave could finally push the EU’s 750 billion euro recovery fund over the line. Although EU leaders agreed in principle over the package this summer, haggling over the details has held up a final deal.
CENTRAL BANK SUPPORT
The European Central Bank and the Bank of England have both put in place extensive support measures and both have signalled a willingness to increase stimulus. That essentially ensures that governments can continue to borrow at rock-bottom rates to keep fiscal spending up.
Indeed, borrowing costs even for the most indebted countries have barely ticked up in the past week. The spread between German and Italian yields is around the same level as before the crisis, a big change compared with March when a surge in yields raised the prospect of insolvency.
Reporting by Balazs Koranyi; Additional reporting by William Schomberg; Editing by Hugh Lawson
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