Economic Aspects of the COVID-19 Crisis in the UK

Central to the mission of the Royal Society’s DELVE  - Data Evaluation and Learning for Viral Epidemics, a data analytics group convened to tackle COVID-19 of which London Business School’s Paolo Surico and Andrea Galeotti are leading research contributors and authors – is a concern that the he lifting of coronavirus restrictions by the government could risk pitting the economy against public health. This in turn might trigger a higher death toll and double-dip recession.

DELVE has therefore released a new report on 8 August 2020, ‘Economic Aspects of the COVID-19 Crisis in the UK’. 

The following outlines the principal messages of the report. 

DELVE has released its report in order to call on the government to pursue a cautious and prolonged reopening strategy in order to save both lives and livelihoods.

The group said targeted government support for businesses and workers will be needed as the economy restructured to accommodate physical distancing requirements, smoothing the transition to a “new normal” in which coronavirus remains a risk without a lasting vaccine.

Among the measures required to safeguard Britain against the economic and health risks of coronavirus are:

• Workplace rotation schemes to limit physical interaction and the spread of the disease.
• Subsidies for workplace testing to control outbreaks, particularly in key industries as well as sectors with more human contact.
• Boosting sick pay to remove a disincentive for self-isolation.
• Drawing up a recovery plan that capitalises on net-zero carbon commitments, boosting job creation in green industries.

Of key importance in the report concerns tracking the impact of economic shocks using real-time transaction data, an area where LBS’s Professor Paolo Surico has made contributions of considerable importance in recent months. The coronavirus pandemic has led to the rapid development of an empirical literature in economics that uses individual financial transactions made by households and firms to track the impact of spread of virus, lockdown, and other government policies. DELVE argues for an expanded effort for data collection in the UK, which up to now lags behind other major economies such as US in the availability of financial transaction data for policy analysis.

Unlike official national statistics, which often take months to compile, financial transactions provide a near real-time account of economic activity. This is a particularly important policy tool when the economy is in crisis and can support evidence-based timely policy responses to major economic shocks. 

An additional advantage is the inclusion of payments data, which offers further granularity, allowing one to measure which firms and households are most affected by economic shocks. For example, one can determine which sectors and regions are hardest hit by lockdown, and design fiscal stimulus accordingly.

It is worth noting that while data for financial transactions have been heavily used for households, there is much less for companies. The impact of uncertainty on investment is likely to be of the same order of magnitude as that for domestic consumption and therefore more work on the corporate side of payments data is clearly required.

Another are of significance in the report is the consideration is gives to possible combinations of economic and epidemiological data to model different scenarios. Policymakers can seek to tailor interventions to sectors and firms in ways that help to mitigate the risks of both a second peak and the looming prospect of a double dip recession. 

Such innovative, non-pharmaceutical interventions would recognise that sectors, firms and individuals are interlinked, with measures taken in one sector likely to affect other parts of the economy. It is also importance to recognise that fear of contracting the virus – or uncertainty about how to manage it – are strong drivers of economic behaviour, meaning continuing anxiety will likely affect consumer confidence. Furthermore, while the prospects for an effective vaccine are uncertain, and the extent to which infection leads to immunity remains poorly understood, creating a need for non-pharmaceutical interventions that may need to persist long-term. 

These “non-pharmaceutical interventions” may include such measures as workplace rotation schemes.  In this specific area of research that LBS’s Professor Andrea Galeotti has contributed conspicuously to the DELVE report and in numerous other journals. Working with Professor Jeffrey Ely, Charles E. and Emma H. Morrison Professor of Economics at the Kellogg School of Management, Northwestern University and Jakub Steiner of CERGE-EI and University of Zurich, Professor Andrea Galeotti observes that as appealing as rotation plans may seem, public health officials have said little about how organisations should implement them. 

Government and business leaders have been left guessing about even the most basic decisions, such as how frequently they should rotate between groups—daily, weekly, monthly? Professor Galeotti and his colleagues’ research – “Rotation as Contagion Mitigation." (working paper) provides concrete guidance to organisations grappling with these questions, pinpointing which plan is best suited for which type of organisation, based on how equipped the organisation is to detect and react quickly to infections.

The DELVE report stated that encouraging staff rotations within a workplace could reduce secondary infections of the virus to an eighth of the size of an outbreak where no such policies were in place. To encourage such policies, it said, government incentives could be used, including state subsidies for short-time working.

Another central area of focus within the DELVE report concerns assessing costs and the design of targeted interventions. The report notes that locking down a community, and closing down economic activity in certain sectors is costly economically, and that “those costs are not equally spread throughout the economy”. “For example,” the report states, “key production activities, such as textiles, chemicals, iron and steel, etc., that are more central in economy-wide supply chains have a much wider impact on the economy when idled.”

As Professor Andrea Galeotti reflects in his Economics Observatory article, ‘How can production network analysis inform policy on Covid-19?’, “The economy is characterised by intricate linkages between consumers, businesses and sectors across national and global supply chains. Production network analysis provides insights into the effects of imposing and lifting lockdowns – and policies to support recovery.”

Furthermore, even if these central production nodes are kept open during a lockdown, their scale of operations is likely to decrease as downstream activities like retail, which serve UK households directly, are kept shut, thereby limiting their demand for intermediate goods and services. Finally, employment declines in such sectors under lockdown inevitably spill over into the rest of the economy via final demand, as households scale back consumption in face of job loss and income uncertainty.

Professor Galeotti’s research into production networks provides a framework to organise these complex patterns of propagation of economic disruption under lockdown, allowing one to estimate and quantify the economic costs of a particular lockdown strategy, either already implemented or proposed. Further, it allows policymakers to discover optimal targeted lockdown strategies. 

“Hence, it is an important input to policy now as we partially re-open the economy, and in the future, if further limited lockdowns are required,” says Professor Galeotti.

In its concluding analysis, the DELVE report observes that a tight lockdown that is released too quickly, or too fully, would in all likelihood lead to “adverse outcomes in terms of both lives and livelihoods”. 

“To be precise, too quickly or too fully here means relaxing the lockdown without sufficient regard for the state of the pandemic, the capacity of the health care system, and epidemiological markers such as the effective reproduction number. The rationale is simple: an abrupt and premature lockdown exit would lead to a second wave of infections that would bring with it both a higher death toll and additional costs for the economy.”

The report follows official figures released earlier in the month that showed that Britain’s economy had entered the deepest recession since modern records began in 1955, due to lockdown measures causing a dramatic decline in economic and social activity.

 

For further reading:

Royal Society DELVE Initiative: Economic Aspects of the COVID-19 Crisis in the UK Aug 14, 2020

What will be the impact of the crisis on household finances?, Economics Observatory, 27th May, updated 23rd July 2020, by John Gathergood with contributions from Paulo Surico, Professor at London Business School

How much will lifting lockdown start to reverse the UK’s economic slump? Economics Observatory, 25th June, updated 10th July 2020, by Tim Munday and Paolo Surico

How can production network analysis inform policy on Covid-19? Economics Observatory, 27th July 2020 by Vasco Carvalho and Andrea Galeotti

Here’s the Best Way to Rotate Workers (or Students) into Buildings to Curb the Spread of Covid-19, KelloggInsight, August 3rd, 2020 by Jeffrey Ely, Andrea Galeotti, Jakub Steiner

‘The Economics of a Pandemic; the case of Covid-19’ by Paolo Surico and Andrea Galeotti, Professor of Economics at London Business School [presentation regularly updated]