Rules or Fear? Tracking the Early Economic Impact of COVID-19 and Mitigation Policies

The Fall/Winter 2020 issue looks at the economic effects of the COVID-19 Pandemic on society and the economy.

Abstract

The Fall/Winter 2020 issue looks at the economic effects of the COVID-19 Pandemic on society and the economy.

Nicola Pierri

npierri@IMF.org

Andrea F. Presbitero

apresbitero@IMF.org

IS IT OVER YET

More than nine months after the World Health Organization (WHO) officially declared COVID-19 a pandemic, infection rates remain high in the United States and various European countries. Several governments are facing difficult decisions as to enforcing new lockdowns or other milder non-pharmaceutical interventions (NPIs) to once again “fatten the curve.” Policymakers therefore must understand the economic and social costs of NPIs. In particular, they need to discern whether the economic impact of COVID-19 is primarily driven by voluntary social distancing by individuals—the fear element—or by the implementation of mitigation policies—the rules element. The first half of 2020 can provide some guidance as to implementing the appropriate kinds of rules (and when) and managing expectations to influence people’s behavior.

A recent IMF study uses several high-frequency indicators—such as electricity usage, smartphone movements, and employment for small businesses and hourly workers—to track people’s mobility and economic activity since the COVID-19 outbreak and around the reopening phase, both across US states and in Europe.

The study shows that the contraction in economic activity is strongly associated with the severity of the health crisis and with the observed decline in mobility, which reflects both voluntary and mandatory social distancing. In contrast, the relationship between NPIs and economic contraction is weaker. This evidence suggests that NPIs are only part of the story, and perhaps not the most important. Compliance and voluntary social distancing matter a great deal. Sweden’s experience aligns with this evidence; it adopted relatively less strict mitigation policies, but many of its residents have been practicing social distancing by choice. Sweden’s observed decline in economic activity, consumer spending, and mobility is only slightly smaller than in neighboring countries.

The recent IMF study digs deeper into the role of voluntary and mandatory social distancing by looking at the evolution of mobility and economic activity over time. In Europe, stay-at-home orders were adopted when the decrease in mobility and electricity usage was already sizable (Figure 1, panel B). In contrast, earlier interventions, such as school closures, were unanticipated and acted as a trigger for the drop in mobility and economic activity (Figure 1, panel D). For the United States, the sharp decline in mobility and economic activity began well before the introduction of NPIs at the state level (Figure 1, panels A and C). This holds true even for school closures, although to a lesser extent.

Figure 1.
Figure 1.

COVID-19, NPI Timing, Mobility, and Economic Activity

Citation: IMF Research Perspectives 2020, 002; 10.5089/9781513564081.053.A005

Sources: https://covidtracking.com; https://github.com/Keystone-Strategy/covid19-intervention-data; Google Community Mobility Reports; Homebase; ECDC; ENTSO-E; Hale and others (2020).Note: Panels A and C plot the changes in hours worked (in percentage point deviations from the pre-COVID baseline) for a large sample of small US businesses, mobility (relative to the pre-COVID-19 period) for the median US state, and the cumulative number of COVID-19 deaths for all US states in the sample. The x-axis shows the number of days before/after the introduction of non-pharmaceutical interventions (NPIs) (shelter-in-place orders in panel A and school closures in panel C). The sample only includes states that had adopted the policy by April 30. Panels B and D plot for European countries the median change in electricity usage (with respect to the previous year), the median change in mobility relative to the pre-COVID-19 period, and the cumulative number of COVID-19 deaths. The sample only includes European countries that had adopted the policy by April 10. NPIs’ introduction and classification are based on Hale and others (2020).

A likely explanation of the difference between the United States and Europe: Americans had time to learn from the European experience and practiced voluntarily distancing and closures before NPIs were adopted. In fact, relative to COVID-19 caseloads during the evolution of the outbreak, NPIs were implemented earlier, and mobility dropped earlier in the United States than in Europe. The United States reached 1,000 COVID-19 cases 11 days after Europe, and the first stay-at-home order in the United States was implemented 10 days after the first stay-at-home order in Europe (in Italy). But mobility in the United States fell by 20 percent compared with January 2020 just four days after Europe (Figure 2). Most likely, news coverage of COVID-19 also played a role. The sharp drop in mobility starts on March 12—the day after the WHO declared COVID-19 a pandemic, the NBA suspended its games, and Hollywood star Tom Hanks revealed that he had tested positive.

Figure 2.
Figure 2.

COVID-19, NPI Timing, and Mobility in Europe Versus the United States

Citation: IMF Research Perspectives 2020, 002; 10.5089/9781513564081.053.A005

Sources: https://covidtracking.com; Google Community Mobility Reports; Homebase; ECDC; ENTSO-E.Note: The figure plots the cumulative number of COVID-19 cases and percentage changes in mobility relative to the pre-COVID-19 period in the United States and Europe. The vertical lines are March 9 and March 19, 2020—the dates when state-at-home orders were issued in Italy and California, respectively.

The lifting of mitigation policies in many countries and states provides additional evidence about the role of NPIs and voluntary social distancing (Figure 3). US states that have allowed nonessential businesses to reopen since late April witnessed a gradual recovery of mobility and economic activity starting about two weeks before the reopening. A similar picture emerges from analyzing the easing of NPIs in European countries. These findings suggest that, in the reopening phase, people’s behavior matters more for the resumption of activities than does the timing of the reopening.

Figure 3.
Figure 3.

Reopening, Mobility, and Economic Activity

Citation: IMF Research Perspectives 2020, 002; 10.5089/9781513564081.053.A005

Sources: https://tracktherecovery.org/; Google Community Mobility Reports; Homebase; ENTSO-E, Hale and others (2020).Note: See note in Figure 1 for the definition of the plotted variables. Panel A sample comprises 45 US states that had reopened by May 30, while panel B comprises data from 21 European countries. On the x-axis, day 0 is the first time that the Oxford stringency index (Hale and others 2020) declines by at least 5 points.

Overall, the study finds that the impact of COVID-19 on the economy is primarily due to the way it affects people’s willingness to actually go out to work and spend, whereas the formal adoption (or lifting) of NPIs has less of an impact. This implies that the economy may not rebound unless workers and consumers feel safe about resuming their normal activities. These findings suggest that avoiding or delaying NPIs may not fully shield an economy from the pandemic shock. Moreover, lifting mandatory lockdown measures—especially when the health crisis is not under control—may not have the expected effect on economic activity, as people would continue to voluntarily limit their mobility. This is a reminder of the importance of preserving the trust of citizens toward health authorities, by ensuring that restrictions are kept in place if necessary and only lifted when appropriate. The study also shows that, although COVID-19 is a truly global shock, regions and countries where the outbreak is more sizable experience significantly larger economic losses. This finding underlines the importance of prevention, early response, and other health measures in containing the outbreak at both the local and national levels, as communities where the virus circulates to a lesser extent are also spared the most adverse economic impact of the pandemic.

IMF Research Perspectives: Fall-Winter 2020
Editor: Mr. Itai Agur