Daily statistics on the number of new infections or the latest death toll serve as stark reminders that the Covid-19 pandemic is, first and foremost, a health crisis that has left an indelible mark on communities around the globe. However, the raft of measures taken to combat the spread of the virus and protect populations has also come at a huge economic cost for most of the world’s nations. There are two factors to consider in this context: First, governments have imposed often far-reaching restrictions on non-essential activities, mobility and schooling. Second, members of the public have voluntarily decided to stay at home, work remotely and limit their social interaction. Social distancing have clearly led to significant declines in revenues in non-essential retail, the hospitality industry and sectors such as travel and tourism. The question is: How did the stringency of the restrictions imposed on populations impact on economic activity – and were voluntary changes in behaviour equally significant in driving down revenues?
A recent issue of Infocus explores this topic based on changes in the Composite Purchasing Managers’ Indices (PMIs), which measure economic activity in industrialised and emerging economies and are regarded as one of the most reliable indicators of the business cycle. As Chief Economist Stefan Gerlach and Senior Economist GianLuigi Mandruzzato explain, the behaviour of PMIs in 2020 and early 2021 show the severity of the shock that hit the global economy – with index levels falling to record lows between April and May 2020 for most of the 15 countries surveyed.
To determine how the stringency of the restrictions versus the pandemic itself affected the PMIs during the pandemic, Stefan Gerlach and GianLuigi Mandruzzato take into account the fact that the severity of restrictions depended on the intensity of the pandemic, among other factors. Using mortality to measure the intensity of the pandemic, they assess to what extent the restrictions in any country at any point in time were usually tight or lax.
Broadly speaking, this model suggests that the stringency of restrictions on the one hand, and the intensity of the pandemic on the other, were roughly equally important in accounting for the decline in the PMIs – and therefore in economic activity – during the first wave of covid. During the second wave, increases in the intensity of the pandemic were a more important driver of the downturn in economic activity than the degree of stringency of the restrictions imposed to contain the virus.
Finally, the model was used to simulate how the PMIs would react in a scenario where the pandemic stopped abruptly – with mortality falling sharply and all restrictions being removed. The model suggested that the PMIs would initially rise to an index value of 63 after one month and 64 after two months – significantly exceeding the threshold value of 50 that signals an increase in aggregate economic activity – before gradually starting to revert to 50. However, given that the pandemic is likely to subside only slowly in reality, these projections needs to be taken with a grain of salt. Nevertheless, the end of Covid-19 will like lead to pronounced increases in the PMIs as life around the globe gradually normalises – bringing a much-needed upturn in business activity to help heal ailing economies.
Download the full edition of our Infocus publication here.