Investment Insights

Exiting lockdown: where’s ready, where’s not, and where risks a second wave?


Piya Sachdeva

Piya Sachdeva

Economist

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In collaboration with Schroders’ Data Insights Unit, we’ve looked into the global state of lockdown and compared this with estimated reproduction numbers (R) to identify who is ready to exit lockdown, who is not and who is potentially exiting prematurely.

Here’s what we found in summary:

  • While China and Korea were the first to exit lockdown, the last could be Brazil, Russia and India, where R estimates are still above 1.
  • Although the US, UK and eurozone are in the position to ease lockdown, with an estimated R around 0.8, the risk of a second wave remains.
  • We would be more concerned about the risk of second waves in India, Russia and Canada.
  • In Brazil, any signs of a premature exit from lockdown would be a major red flag.
  • In terms of the global economic recovery, there is still a clear risk of a W-shape recovery, particularly if lockdowns are eased too quickly.

What’s the state of lockdown around the world?

Academics at Oxford University have constructed a lockdown index - the Oxford Covid-19 Government Response Tracker –which helps us to track how governments around the world are acting on coronavirus.

In the final week of April, the measure – which includes school and work closures among other things - shows that the largest economies of the world were still effectively in lockdown.

At that time, China and Korea were the only large economies to have eased restrictions enough to move the dial. Of course, life is by no means back to normal, but these countries are the closest, as shown in the two charts below.

Developed-markets-lockdown-index-chart.jpg

Emerging-markets-lockdown-index-chart.jpg

Some countries have taken an alternative approach to full lockdown. Sweden, for example, banned gathering of more than 50 people, but left restaurants, schools and workplaces open.

Reflecting their early policy response and low death tolls, smaller European countries (Norway, Austria, Denmark and Czech Republic) eased restrictions in mid-April, opening schools and small shops.

Meanwhile, Spain allowed some factory and construction workers to return to work and Germany took some tentative steps only a few days later. Italy began to ease restrictions the week beginning 4 May and France has also outlined its exit plans. In the US, 29 states have now loosened restrictions.  

The UK and Russia are the latest to relax their lockdowns, both allowing workers in construction and parts of manufacturing to return to work. India and Japan are also extending lockdowns, but relaxing the rules for areas with fewer reported cases.

Various governments have now provided some guidance on their exit strategy.

Lockdown-timelines-table-2.jpg

Why is R the crucial number?

As the number of daily fatalities continues to fall, governments are eager to reopen and resume economic activity. In the absence of a vaccine or herd immunity, countries can come out of lockdown when the transmission potential of Covid-19 has fallen enough.

In a population where everyone is susceptible, R0 – the basic reproduction number - is the number to watch. This is the average number of secondary infections produced by a typical case of an infection. For example, an R0 of 2 means each infected person infects two more.

But once an epidemic starts spreading, some people in the population develop immunity.  The key number then is R - the effective reproduction number. This accounts for the number of people infected when some people in the population have developed immunity.

This is the crucial number that matters for judging whether to relax lockdowns.

How do various countries’ R numbers compare?

R estimates calculated by the Schroders Data Insights Unit based on deaths is shown below.

estimated-r.jpg

As China is now reporting no deaths from Covid-19, the R for China is effectively at zero.

At the other end of the spectrum, the R for Brazil, India, Russia and Canada (using Ontario data) are still above or at 1; suggesting exiting lockdown is premature. This is especially the case for Brazil and India as the R continues to rise. We hesitate to add Korea into this group as the number of daily deaths is so low (at one or two a day in the last week).

Meanwhile, estimates for most other developed markets including the eurozone, UK, Japan and the US (using New York data) are in the range of 0.6-0.8 and falling. This suggests that these countries can relax lockdown but are still susceptible to a second wave.

Though the R alone is informative, the state of lockdown provides useful context for investors thinking about the shape of the economic recovery. R vs lockdown (Chart 4) provides a rough snapshot of which “stage” economies are in dealing with the virus; stage 1 (high R, low lockdown), stage 2 (high R, high lockdown), stage 3 (low R, high lockdown) and finally stage 4 (low R, low lockdown).

lockdown-v-r-chart.jpg

Interestingly, Korea, Sweden and Japan have managed to reduce their R without implementing ultra-strict lockdown measures, “jumping” from stage 1 to 4.

If Sweden and Japan successfully escape a second wave, these economies could be the next to go back to “normal". Currently in the stricter lockdown of stage 3, Europe and the US will likely continue to ease restrictions. Finally, Russia, India, Canada and Brazil are still in stage 2.

Brazil, with the highest R (and rising) and less restrictive measures than its emerging market peers, could potentially be the world’s laggard.

Who is at most risk of a second wave?

Technically a second wave captures when the number of deaths has already peaked and then rises again. But when thinking about a “W-shape recovery”, it is also important to include countries where deaths have not yet peaked and restrictions are being eased, since this introduces a risk of a second wave of restrictions.

Taking this into account, we disregard Brazil as a candidate for a second wave as fatalities have not peaked and restrictions are not being rolled back, though protests suggests there could be lockdown fatigue.

On the other hand, we include India and Russia despite fatalities yet to peak.

Ultimately, those countries with an R above or close to 1 that are easing restrictions are at the most risk of a second wave. In this respect, India, Russia, Canada and Korea are at the highest risk.

The number of deaths is also important to consider. For example, an R of 1 in Korea suggests that, with no other action, deaths will persist at current levels. However, you would argue that this is less concerning given the extremely low number of daily fatalities (at one to two per day).

Meanwhile, the US, Europe and Japan are at less risk of a second wave, though we caution the risk remains, particularly if they attempt to come out of lockdown too quickly.

Finally, though we excluded Brazil as a candidate for a second wave, anti-lockdown protests and friction between central and state governments suggest lockdown fatigue. If this were to result to measures being rolled back, this would be a major red flag for a second wave. 

What do we conclude from our analysis?

At this stage, with an R above 1 and minimal exit strategy, Russia, Brazil and India are set to be the last out of lockdown. Investors should be particularly wary of India, Russia and Canada, who are at the highest risk of a second wave.

The risk is lower for the US and Europe but still remains, with R estimates around the 0.8 mark. These economies should be careful of exiting lockdown too quickly.

Finally, experiencing the highest reproduction rate of the virus, signs of a premature exit in Brazil would be a major red flag for a second wave.

In terms of what this means for the global economic recovery, we conclude that there is still a clear risk of a “W-shape” recovery, particularly if lockdowns are eased too quickly or lockdown fatigue sets in.

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