Merrill: “Most of the slowdown occurred due to voluntary social distancing rather than lockdown policies”

This is an important note and suggests the economy is dependent on the course of the pandemic.

Merrill Lynch economists put out a note this morning: Nordic Lessons. Here are a few brief excerpts:

One of our core views is that both voluntary and mandated social distancing have significant impacts on the economy. A new academic paper out of the University of Copenhagen and CEBI quantifies the effect of each kind of social distancing on consumer spending during the COVID-19 pandemic. …

Let us start with the facts. The outbreak began at the end of February in Denmark and Sweden. … Since then the two countries have diverged significantly in terms of health care outcomes. As of May 18, Denmark had 95 deaths per million people, while Sweden (363 per million) has had among the highest COVID-19 mortality rates in the world.  This difference points to a large healthcare benefit from lockdown policies. What about the economic costs?

The paper finds that consumer spending dropped by 25% in Sweden and by 29% in Denmark. The 4pp difference between the two declines quantifies the cost of lockdown policies. While 4% of consumer spending is not trivial, it is a small share of the total decrease in consumer spending. Therefore the data indicate that most of the slowdown occurred due to voluntary social distancing rather than lockdown policies.

If the paper’s results are applicable to other countries, they have important implications for the economic outlook. … Even as restrictions are lifted, consumer spending will likely remain highly impaired, with services getting hit the hardest. Ending lockdowns might also limit the activity of more vulnerable people, further delaying the recovery.

In summary, the economic downturn has been primarily because of the virus, not the policy response.
emphasis added