Lockdown economics

Posted by: Paul Donovan

17 Mar 2020
  • More economies are going into lockdown. There are few reasonable economic comparisons to this situation. Wartime language suits politicians, but wartime maximizes production. Lockdowns minimize production. Disaster aftermaths offer some guidance. There may be some hints in the typical 3% q/q declines in GDP during "grandes vacances" in parts of Europe. But this is uncharted territory.
  • A lockdown is a demand shock. The risk is that companies fail as a result of this, creating a double demand drop. French President Macron announced a series of measures, including a pledge that no French firm would fail. Last year, over 51,000 French firms failed. The cost of this pledge is up to 12% of GDP. A realistic assessment of the cost of supporting small company employment for two months is perhaps 1.5% to 2.0% of GDP.
  • Lockdowns have other effects. As people become more isolated, they may obsess more about social media. Social media is a super-spreader of fear. It confirms biases (the "echo chamber"). That could mean investors and financial market professionals may be less rational and less efficient when working in isolation.
  • The US NBER has said it may declare a "recession". This is a less than useful contribution of the economics profession to the crisis.

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