Myths and truths of the Covid economy for investors to ponder

There are a lot untruths and bare faced lies rattling around. Today I am looking at some myths and truths of the Covid economy for investors to ponder

Article updated: 18 June 2020 2:00pm Author: Michael Baxter

Myth one: Lockdowns are causing economies to crash

The evidence is unclear whether lockdowns or the virus itself is causing economies to slow. Measures imposed in Sweden to curtail the threat of Covid have been much less severe than in most other countries. And sure enough, while GDP in Sweden is expected to contract, in other countries the economic hit is expected to be higher. Capital Economics, predicts an 8% contraction in GDP as a result of the virus, the UK and Italy are likely to see a 25% fall.

On the other hand, Norway and Denmark, which have seen full lockdowns, are expected to see a more modest economic slowdown this year than Sweden, according to Danske Bank

In Brazil, President Jair Bolsonaro, has been a Covid cynic and ignoring guidelines. State governors have imposed lockdowns but not with the support of the President. Brazil has seen the world’s second highest death toll from Covid, furthermore the virus still appears to be spreading. Yesterday the country experienced its highest number of cases so far.

As for the economy, despite the stance taken by Mr Bolsonaro, Brazil is expected to see a sharp contraction of between 10 and 15% of GDP in Q2.

Myth two: The economic hit caused by lockdowns will cause more deaths than the virus

Some argue that the potential death toll caused by the lockdowns, with rising suicide rates, for example, will be greater than if Covid was allowed to spread without lockdowns.

However, while the hard data does support the claim that suicides rise in a recession, history suggests that the overall death rate falls. During the US Great Depression of the 1930s, death rates fell to the lowest level ever recorded at that time. 

Myth three: Inflation will surge

There is a view that an inevitable consequence of Covid will be a sharp rise in inflation, and maybe hyperinflation.

Inflation occurs when aggregate demand consistently rises faster than output. Post-Covid, there will be enormous spare capacity and the economy will need big rises in demand just to close the gap with potential supply. Many economists fear that post-Covid, both households and businesses, will save more. If that is right, we will see the precise opposite of the conditions that lead to runaway inflation.

The latest data on UK inflation show that it has fallen to a four-year low, hardly indicative of surging inflation as some argue.

Myth four: The need for a lockdown is a myth, look at Sweden

Sweden hasn’t imposed a full lockdown, yet it's death toll hasn’t reached the levels many warned of. In fact, on a per capita basis, it has had slightly more people test positive in proportion of its population than the UK, but slightly less deaths. Deaths per million in Sweden were 489 and in the UK 618.

However, Sweden and the UK are different in other key respects. Sweden is less densely populated than the UK and has less inequality and poverty. Maybe more to the point, in Nordic countries, people tend to be far more trusting and are more likely to follow official guidelines. Perhaps, Swedes practice social distancing by default — they are not famous for being a nation of huggers.

What we can say is that Covid infections and deaths have been much lower in Denmark and Norway; where full lockdowns were imposed. Norway has seen 45 deaths per million people and Denmark 109. Finland has seen death rate per million between Norway’s and Denmark’s.

Myth five: The virus is defeated

Unless a vaccine or therapy becomes available at a large scale soon, there is a strong risk of a second wave of the virus. 

Truth one: The biggest economic opportunity

The economic opportunity created by Covid is that we will see an acceleration in the adoption of digital technologies by business. This may lead to a sharp pickup in growth in productivity and there is evidence, for example, that remote working is associated with higher productivity.

The risk is that the price we pay for improved productivity is a slow recovery in jobs. If we can somehow have both increases in productivity and rapidly recovering labour markets, then output will soon recover and maybe even grow a lot faster than before Covid. If this happens, the economy will boom and stock markets should reflect this.

Truth two: The biggest economic risk

The big long term risk is that as a result of the virus, we see a backlash against globalisation and we repeat the policy errors implemented following the First World War. If we seek to punish China (as the allies punished Germany), if we see falling support for global institutions such as WHO and WTO, and if we see more barriers to trade then, just as happened between the world wars, the global economy will experience a massive hit, with terrifying longer term implications.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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