Lockdown and economic activity

21 May 2020

As various countries start the process of ending the lockdown, this is expected to kick-start the global economy. However, the performance of each country will be influenced by the speed and manner with which restrictions are relaxed. In this Macro Flash Note, GianLuigi Mandruzzato looks at the economic impact of the measures taken to contain the spread of Covid19 and what can be expected of incoming economic data as the easing of the lockdown gains momentum.

The first quarter of 2019 saw a collapse in GDP as a result of measures taken to contain the Covid19 pandemic. These differed in timing and intensity across developed and emerging countries. China, where the pandemic originated, reacted first by adopting a very stringent containment strategy, which it then relaxed when the spread of Covid19 was under control. European countries, on the contrary, first hesitated and then imposed very strict limitations on freedom of movement and economic activity. An exception was Sweden, which implemented much less restrictive measures, often limited to mere recommendations. It is then natural to ask if there is a relationship between the variety of containment strategies adopted and economic activity.

The Stringency Index compiled daily by the Blavatnik School of Government at Oxford University permits a comparison of the intensity of the policies taken across countries. The monthly Purchasing Managers’ Indices (PMIs) make it possible to assess in a timely way the impact of the lockdown on economic activity on a large set of developed and emerging countries.1 For 14 countries, the index is available for both manufacturing and services sectors, allowing an assessment of the impact of the lockdown on different parts of the economy. The latest available PMI data is for April.

For the period between January and April, Charts 1 a-b compare the changes of the monthly average of the Stringency Index to the changes of PMI output indexes in the manufacturing and services sectors in the sample countries. A stronger rise in the Stringency Index, corresponding to a stricter lockdown, is associated with larger declines in output.

Chart 1a. Lockdown and PMI Manufacturing Output (Jan-Apr)

Chart 1b. Lockdown and PMI Services Activity (Jan-Apr)

Source: Oxford University and EFGAM calculations as at 19.05.20

Across these countries, a 10-point increase in the Stringency Index has been associated with a 6-point fall in both manufacturing and services PMIs. Within countries, though, the imposition of the lockdown had a greater impact on the services sector than on manufacturing. For the 14 countries in the sample, the median of the services index fell by about 40 points between January and April, while the manufacturing sector the median decline was less than 30 points.

This illustrates how the stringency Covid19 containment measures is hugely important for economic activity. Furthermore, the impact of the measures implemented so far was felt more strongly in the services sector than in manufacturing.

It is thus encouraging that since the end of April many governments have relaxed some of the restrictive measures and that this process will intensify in the coming weeks. However, the median Stringency Index for the countries in the sample fell only slightly in the first half of May and remains much higher than in March (see Chart 2a). This suggests that the PMIs will increase only moderately in May and that a a more sizeable rebound will be delayed to June if the easing of the lockdown continues according to governments’ plans.

Chart 2a. Oxford University Lockdown Stringency Index (monthly average)

Chart 2b. Oxford University Lockdown Stringency Index (monthly average)

Source: Oxford University and EFGAM calculations as at 19.05.20

Finally, it is interesting to observe the recent behaviour of Stringency Indices in the major European economies (see Chart 2b). Comparing mid-May values with the April average, Italy recorded the strongest decline in its Stringency Index, followed by Germany, while France, the United Kingdom and Spain have so far recorded a more limited relaxation of lockdown measures. If the relationship that emerged between January and April is unchanged, the PMIs should rebound more sharply in Italy and Germany than in the other major European economies.