France went into full lockdown on Friday. It is illegal to leave your home except for essential shopping, to work in essential businesses, for medical reasons or to take the one hour of exercise allowed. Non essential businesses will be shut down. Germany has announced also announced a national lockdown, though less severe than in France. Italy has announced a partial lockdown including shutting bars and restaurants at 6pm. It seems likely that eventually something similar will happen in the UK.
The US Coronavirus new infection numbers are also shooting up well above earlier peaks with 7% of those tested testing positive. Presidential candidate Biden has indicated that he would adopt a more restrictive approach to Coronavirus than President Trump including European style lockdowns. He cannot take office before end January, though.
Before the second wave, the Q3 economic bounceback in various parts of the world, especially the US, had been noticeably stronger than expected. But the likely new wave of lockdowns should reduce GDP in Q4 around the world.
The effect (compared with the level of GDP after bouncing back in the summer) will be a decline in GDP. But the scale of the fall will be much less than that in Q2 because of the failure of much of the economy to recover. A quick glance at the industries that might be affected suggests that lockdown would reduce monthly GDP by about 5-10% further for the worst affected month depending on the intensity of the lockdown. Losing a lot of Christmas-related spending will have a distinct impact since December retail sales are about 50% higher than the monthly average.
Much of this could continue into the new year, given the apparent severity of the second wave and its correlation with cool weather. But we expect robust growth in the second half of 2021 assuming that this wave blows itself out and that vaccines eventually become available.
Once economies start to recover and move away from the immediate fire fighting, in the second half of next year at latest, the focus passes to indebtedness. It is clear that there is no wish by politicians to impose austerity. But forex markets will look at least at the comparative position. Turkey is the most obvious current example. The currency has fallen by a fifth since the summer, having fallen by about an equivalent amount in the first half of the year. The interest rate for Turkish lira swaps has been raised to 11.75%. The lessons of Turkey, after Argentina and Venezuela, are such that most countries will not want to take the risk of getting into a similar situation.
The good news (of a kind) is that if a run on the currency can be avoided, a serious surge in inflation is also unlikely as mass unemployment will hold down labour cost inflation.
The differential effects of this across countries could be sufficient to change the balance of world economic power. If China manages to avoid a second wave, it could gain a further year to 18 months in its economic race with the West, on top of the two to three years it has gained already through the crisis. There are also wider implications. Social unrest has been building up with tensions erupting in violent protests in Italy and Spain this week. Many young people are confined to not especially salubrious accommodation and with jobs at risk. And with the recovery highly tech based, it will almost certainly widen the inequality gap, fuelling the flames of discontent.
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