Do lockdowns work?

Recent research by accounting software company QuickBooks provides a fascinating view into the global impact of Covid-19 lockdowns on economic performance.

The table below lays it out. It compares days in lockdown with expected economic performance in 2020.

Russia’s economy is expected to contract 26% this year with just 43 days in lockdown. The UK went 99 days in hard lockdown and its economy is likely to contract 19% this year.

Then comes SA: a 16% economic contraction with 60 days of lockdown (before lockdown restrictions were relaxed).

The hard lockdowns and shuttering of businesses such as restaurants and hotels had a devastating economic impact.

Difficult decision

“Policymakers have had the difficult decision of when to implement lockdown, the severity of restrictions, and how long to keep measures in place for,” says the QuickBooks study.

“Lockdown restrictions have been met with both open arms and criticism in places all over the world. For example, in South Africa, the strictest measures were put in place to combat some of the highest levels of the virus. The country banned the sale of alcohol and tobacco.”

The countries with the most severe economic contractions are:

1. Russia (26%)
2. UK (19%)
3. South Africa (16%)
4. Spain (14%)
5. Hungary (14%)

The countries with the lowest economic contraction of GDP are:

1. Australia (5%)
2. Switzerland (8%)
3. Canada (8%)
4. Italy (10%)
5. Norway (11%)

The UK experienced the longest lockdown, followed by Spain.

Three of the five countries that have spent the least amount of time in lockdown have experienced the lowest contraction in GDP. Switzerland experienced 42 days in lockdown, and Australia and Canada 49 days.

Country	Dates in lockdown	Days in lockdown	GDP 2019 ($)	GDP 2020 forecast ($)	% change
Russia	30 March – 12 May	43	1 700 billion	1 250 billion	-26%
UK	16 March – 23 June	99	2 827 billion	2 280 billion	-19%
South Africa	26 March – 25 May	60	351 billion	295 billion	-16%
Spain	14 March – 20 June	98	1 394 billion	1 200 billion	-14%
Hungary	28 March – 6 June	70	161 billion	139 billion	-14%
France	17 March – 11 May	55	2 715 billion	2 400 billion	-12%
Germany	22 March – 20 April	29	3 845 billion	3 400 billion	-12%
Norway	12 March – 15 June	95	403 billion	360 billion	-11%
Italy	9 March – 18 May	70	2 001 billion	1 800 billion	-10%
Canada	16 March – 4 May	49	1 736 billion	1 590 billion	-8%
Switzerland	16 March – 27 April	42	703 billion	650 billion	-8%
Australia	20 March – 8 May	49	1 392 billion	1 320 billion	-5%

* The United States did not enter an overall nationwide lockdown. Rather, each state had its own lockdown. Source: QuickBooks, Trading Economics.

While lockdowns are justified as necessary to save lives, the economic effects are devastating, with spending plummeting to all-time lows. Research by financial firm Jefferies in the US shows that in states such as Arizona, Texas and Utah – where the number of Covid-19 cases was rising dramatically – spending starts to contract. When comparing state data on Google (which looks into retail and recreation establishments), states with high infection numbers are performing worse than others.

Different approaches

“Denmark and Sweden approached lockdown quite differently, with Sweden choosing to trust its people to behave responsibly rather than enforce a lockdown,” says the QuickBooks study. “Meanwhile, Denmark introduced one of the earliest and strictest lockdowns. Although Sweden’s death rate was five times higher than Denmark’s, the economic impact was similar.”

Dhaval Joshi of BCA Research explains this apparent anomaly in that people change their behaviour whether there is a lockdown or not.

They avoid public transport, stay away from shops, and refuse to send their children to school.

Russell Lamberti of ETM Analytics has been keeping a close eye on the economic impacts of Covid-19 on the local and international economies.

Lamberti says the widely-reported forecast of 16% economic contraction for SA in 2020 is likely understated.

“Why? Because the services sectors were hurt badly, yet the official stats show they contracted just 8% to 9% in Q2 (the second quarter). This is hardly believable. In the US and UK, services contracted between 20% and 25%. It is unlikely that SA services escaped so lightly.”

‘Overkill’ in SA

Add to this the “overkill” of banning alcohol, cigarettes, e-commerce and hot chicken (during SA’s hard lockdown phase), and the reliability of SA’s official stats looks suspect.

This raises questions about the reliability of GDP figures which are based on employee compensation and a sampling of a measure of corporate gross profits (for the most part).

“SA had one of the hardest lockdowns in the world, now it has one of the softest, so we should see a decent economic bounce – off a very weak base – in the second half of this year,” says Lamberti.

“But if you look under the hood of the SA economy, there’s a lot of bad stuff still to come,” he adds.

“The job market is struggling to recover, household incomes are under pressure, and commercial property valuations are seriously down.”

The difference between a 1% and 2% GDP growth is within the margin of statistical error, and can easily be influenced by government borrowing. “The margin of error with regard to GDP figures is higher under Covid than is normally the case, which means we should exercise caution in trusting the figures we have been presented with.”

Read: Economic lockdown: Who are the winners and losers?

Moreover, countries can goose the GDP numbers with extreme borrowing and printing, but this comes at the expense of deteriorating household, corporate and state balance sheets, says Lamberti.

He believes corporate SA will use the Covid crisis to restructure their costs and their employment requirements.

Some 2.2 million jobs were lost in the second quarter of 2020 and only about 400 000 of these have been recovered when adjusting for seasonality in employment. Some companies will close their doors only to reopen again under a new name with a slimmed-down staff structure.

As to the impact of Covid on global death rates, the data so far suggests it has had a negligible impact on ‘normal’ death rates.

Slightly less than 1% of the world’s population dies each year from all causes, and 2020 is unlikely to show a significant change to this.

“What we’re really dealing with is mass panic,” says Lamberti. “As we gather more data, we get a better understanding of the pandemic and what policy responses work and which ones don’t.

“Lockdowns are likely to result in more loss of life than Covid, through loss of income and impoverishment and the associated effects of this, untreated illnesses, mental health problems, and political conflict and crime.”

Long or short lockdowns

The data is patchy when it comes to determining whether there’s a correlation between economic contraction and the length of lockdown.

It is possible that people’s overall behaviours have more of an influence, with populations behaving differently in a pandemic regardless of a lockdown. Research by McKinsey reported that while the uncertainty from Covid-19 continues, its impact is felt differently across different countries.

The US was unique in that it didn’t introduce a nationwide lockdown, and instead allowed states to set their own rules.

As many countries go through a second wave of infections, the default policy position appears to be more lockdowns – when the data does not always support this approach.

Read: Government told to provide evidence for ongoing lockdown or prepare for court