Lessons from second virus waves

The experience from second virus waves in Australia, New Zealand and Japan is that consumer spending falls even if governments don’t impose major restrictions. However, there are three key reasons why second waves may be less damaging to economic activity than previous ones.

Australia, New Zealand and Japan have all successfully battled second virus waves in recent months. New Zealand’s second wave was less severe than the first and was met with less restrictions. After shutting down all non-essential businesses across the country in March and April, it only limited activities that require close physical interaction with customers in Auckland in August. Outside of Auckland, which accounts for one-third of the population, the government merely restricted large gatherings.

Australia’s first wave was spread across the country. By contrast, the second wave was almost entirely concentrated in Victoria, where hospitalisations and deaths surged far above the levels seen during March and April. Victoria had asked citizens to only leave the house for essential shopping and work during its first wave and again started doing so in July. But with new virus cases rising further, it resorted to a more draconian lockdown at the start of August and forced all non-essential businesses to shut down.

Japan’s first wave was also met with rather mild stay-at-home requests, though the government asked department stores and entertainment venues to shut during the state of emergency that lasted from April to May. Its second wave was more severe in terms of cases, but not in terms of hospitalisations and deaths. As such, the government responded to the second wave with only minimal restrictions such as asking bars and restaurants to close at 10.30pm. We suspect that effective contact tracing reined in the second wave.

There are several lessons we can draw from those second waves. Worryingly, localised outbreaks can affect activity elsewhere, too. Mobility declined in Sydney in July even though the closure of the border between Victoria and New South Wales should have prevented the spread of the virus into Sydney. And it stopped rising in Perth and Brisbane. What’s more, consumer spending typically falls even if governments refrain from imposing major restrictions.

However, there are three reasons to be optimistic about the impact of second waves on economic activity. First, government restrictions are mostly targeted at retail and hospitality, allowing output in other sectors to recover. Hours worked kept rising in Victoria in July even as retail sales declined. Likewise, Japan’s industrial production jumped by 8.7% m/m in July even as the second wave accelerated. We are already seeing a similar trend in Germany, where surveys suggest that concerns about the virus have caused services activity to weaken, but industrial production has continued to recover. Indeed, we expect Q3 GDP to bounce back by 1.5% q/q in Australia, by 4.5% in Japan and by 11% in New Zealand. In Q2, output fell by 7.0% q/q in Australia, by 7.9% in Japan and by 12.2% in New Zealand.

Second, concerns about the virus are becoming less of a drag on consumption. This is most evident in Australia, where retail sales in Victoria only fell 2.1% m/m in July and were still 3% above pre-virus levels. By contrast, sales plunged by 21% m/m in April and were 15% below pre-virus levels. Government restrictions in those two periods were the same and mobility wasn’t much higher in July than in April. But in contrast to the first lockdown, when many department stores closed voluntarily, most of them remained open in July and consumers kept spending.

Admittedly, the 7.0% m/m drop in New Zealand’s electronic card spending in August was almost as large as the 8.4% m/m slump in March. But Japan’s experience also suggests that households are becoming less sensitive to virus outbreaks: The 2.4% m/m drop in July’s consumption activity index, which includes spending on goods as well as services, was much smaller than March’s 6.9% m/m plunge. The government only asked department stores to close in April, so the plunge in March was entirely driven by consumer behaviour rather than government mandate.

Finally, firms and consumers are getting better at dealing with restrictions on activity. While retail sales in Victoria plunged by 12.6% m/m in August as all non-essential businesses had to close, that still left them above the trough in April, when restrictions were less draconian. We don’t have the full breakdown of the August data yet, but we suspect that a shift to online sales prevented a bigger slump. Likewise, overall hours worked didn’t fall below their April level even though manufacturing and construction are now heavily restricted.

The opinions expressed are those of Irongate using the independent research of Marcel Thieliant of Capital Economics and are subject to market or economic changes. This material is not a recommendation or intended to be relied upon as a forecast. You may get back less than the amount invested. The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise.

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