Lockdowns and social distancing have 'near comparable' role in global economic crisis, IMF says

Economic growth is likely to remain subdued until health risks fully abate, the fund says

Moncloa square in Madrid. Spain is among countries that posted sharp increases in coronavirus cases, underscoring the IMF's call on governments to double down on fiscal support. Bloomberg

The adoption of lockdowns was a salient contributor to the economic contraction globally, but social distancing played a substantial role in mitigating the rise of infections and easing restrictions may help with a partial recovery, the International Monetary Fund said.

Growth is likely to remain subdued until health risks abate, the Washington-based lender said in a chapter of its forthcoming World Economic Outlook to be released in full next week.

Countries must protect the most vulnerable and find ways to support economic activity compatible with social distancing, for example, by reducing contact intensity in the workplace and enhancing work from home where possible.

"Regression results show that lockdowns have a considerable negative effect on economic activity," the IMF said in The Great Lockdown: Dissecting the Economic Effects chapter. The fund will release its revised growth projections next week during the annual meetings it holds with the World Bank. In June, it projected the world economy would contract 4.9 per cent this year, with only a mild recovery next year.

“The analysis suggests that lockdowns and voluntary social distancing played a near comparable role in driving the economic recession,” the IMF added.

The contribution of voluntary distancing in reducing mobility and subsequent economic slowdown was stronger in advanced economies, where people can work from home more easily and sustain periods of temporary unemployment, according to the report.

The IMF said it analysed a sample of 128 countries for the economic effects of lockdowns and social distancing, using two high-frequency proxies for economic activity: mobility data from Google and job openings posted on the website.

Looking at the recovery path ahead, lifting of lockdowns are unlikely to bring economic activity back rapidly to its full potential if health risks remain.

“One enduring lesson from the Covid-19 pandemic is that any lasting economic recovery will depend on resolving the health crisis,” Francesco Grigoli, an IMF economist and Damiano Sandri, deputy division chief at the fund’s research department, wrote in a separate blog on Thursday.

“Lifting lockdowns is unlikely to lead to a decisive and sustained economic boost if infections are still elevated, as voluntary social distancing will likely persist.”

The Covid-19 pandemic tipped the global economy into its deepest recession since 1930 as it upended global trade and severely disrupted the travel and tourism industry. Governments and central banks have so far poured in more than $12 trillion of fiscal and monetary support to stabilise financial markets and protect jobs.

There are green shoots of economic revival, but the fragile recovery is under threat as countries face second and third waves of Covid-19.

The IMF said economies will continue to operate below potential while infections continue to rise. The pandemic has claimed more than 1 million lives, and infected over 36 million people globally, while 27.4 million have recovered as of Thursday, according to Worldometre, which tracks the disease.

The resurgence of the virus underlines the need for policymakers to be “wary of removing policy support too quickly” and consider ways to protect the most vulnerable and support economic activity consistent with social distancing, the fund said.

“These may include measures to reduce contact intensity and make the workplace safer … [and] promoting contactless payments.”

Policymakers should also pursue alternative ways to contain infections that may involve lower short-term economic costs than lockdowns, such as expanding testing and contact tracing and promoting the use of face masks.

Lockdowns can be effective in curbing infections, if enforced early and strictly, however, the crisis they generate disproportionally affect more vulnerable groups, it said.

There was a larger drop in women’s mobility, relative to men, in the wake of stay-at-home orders in Italy, Portugal, and Spain, the IMF said.

“This effect is largely due to the disproportionate burden that women face in caring for children, which may prevent them from going to work, thus jeopardising their employment opportunities,” the IMF officials wrote in a blog.

“Targeted policy intervention – such as strengthening unemployment benefits and supporting paid leave for parents – is thus needed to protect more vulnerable people.”