Multi-Asset

Examining the relationship between social distancing and economic activity

As the global spread of COVID-19 continues, the United States’ timeline to practice social distancing has now been extended through the end of April.
April 2020

As the global spread of COVID-19 continues, the United States’ timeline to practice social distancing has now been extended through the end of April. The crisis continues to evolve, leading to questions of how long the social distance measures will remain, how severe will the infection rate get, and when will peak cases be reached. Gauging the length of these measures is crucial to anticipate the economic impacts to U.S. businesses and consumers.

How to stop the spread

Social distancing measures are in place to limit the spread of the coronavirus and to avoid overwhelming the health care system. Consequently, as these measures suppress the infection rate, they also suppress economic activity. Lessons from China, South Korea, and Italy reaffirm that widespread testing is critical to monitor the effectiveness of social distancing orders and the trajectory of the virus. Breakthroughs in testing, such as testing for the COVID-19 antibodies, quick response tests, and test manufacturing may help manage the crisis faster and allow governments to relax social distancing measures.  Once policies are more normalized, access to rapid testing is critical to allow economic activity to resume without a devastating second wave of infections. The expansion of testing across the states will allow officials to properly track the spread of the virus and remain confident in the data when it begins to suggest daily new cases are declining and we are past peak cases.

State discretion

Since the virus began to spread in the U.S., social distancing guidelines have been enacted in different forms and timelines across the states. Some have ordered residents to “shelter-in-place”, others have closed non-essential businesses, or closed public spaces to avoid gatherings. The spread across states has varied, making the timeline of when we will reach peak cases more unclear.  Ultimately, the relaxation of social distancing measures will happen state by state, over time, and will entirely depend on each state’s confidence that the worst is over. Further, state governments will likely assess their individual health care capacity. As infection rates have grown in the U.S., it has become apparent that health care systems capacity, procurement of protective equipment, and quantity of test kits range widely across the states. These factors will also influence when a state feels confident to ease social distancing and allow people back to work. As more businesses reopen and people begin to leave their homes to go to work, an additional flare-up of infections is likely, which may force governments to respond with a “start-stop” approach to their movement restrictions. Finally, lifting “shelter-in-place” orders will not necessarily mean a full reboot in the economy. States can first allow most employees back to work, then allow retail stores to open, and once data suggests the infection rate is not growing too rapidly, reopen restaurants for dine-in, and eventually allow large events and public gatherings.

Economic consequences

Social distancing, business closures, and lock downs have now pushed the global economy into recession. However, the extent and length of the coronavirus’s impact on the economy will continue to grow as social distancing guidelines weigh on activity and consumer sentiment.

Negative GDP growth and rapidly increased unemployment rates are anticipated throughout the first half of 2020. Signs of economic recovery can be expected in the second half of 2020 after states reach peak cases, social distancing measures are relaxed, and workplaces are reopened. With the uncertainty that lies ahead, China serves as a positive light in what is to come once social distancing measures are relaxed and society can inch toward back-to-normal.

Moving forward, we will continue to monitor the number of cases and guidance from public officials on the timeline of shelter-in-place orders and when the public can go back to work. However, we do not expect life and economic activity to snap back after social distancing is relaxed. The economy will be tens of millions of jobs short of levels from a month ago and sporadic pockets of infection are bound to appear. It will take several quarters for those unemployed to find jobs – either at their previous employers or elsewhere – and likely even longer to fully restore consumer confidence. Beyond the consumer, business travel, large conferences, and entertainment events may be significantly delayed. Eventually, we believe rapid testing and the potential for a vaccine in 12 to 18 months could ultimately heal the consumer psyche, the labor market, and the broader economy.

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Disclosures

Views and opinions have been arrived at by BMO Global Asset Management. The information, estimates or forecasts provided were obtained from sources reasonably deemed to be reliable but are subject to change at any time. This publication is prepared for general information only; it should not be construed as investment advice or relied upon in making an investment decision. All investments involve risk, including the loss of principal. Past performance is not a guarantee of future results.

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