New lockdown bodes economic misery
My first article of the year cannot be about anything but the Covid-19 lockdown. Actually, I planned to write about the two-month disappearance of the world-famous Jack Ma — founder of Alibaba and Alipay. He has an innovative idea to revolutionise the Chinese financial system but his revolutionary idea was not agreeable with Chinese authorities and caused him to “disappear”. What interests me is not China’s internal affairs. But his idea, once put into use, will revolutionise the global economy as well. Milton Friedman (a Nobel Prize laureate in Economics and the father of monetary policy) and his Optimum Quantity of Money theory will become useless. His idea, if taken far enough, might be able to pull the world economy out of the Covid slump. Sound interesting? Readers have to wait until my next article, which will come in two weeks’ time.
This week, the article has to be about the economic effects of an economy-wide lockdown from the new outbreak of the pandemic. Despite the five-fold increase of daily new infections of Covid-19 when compared to the first outbreak in the second quarter of last year, the Thai government is trying to avoid a “complete” lockdown at all costs in fear of the economic repercussions. The expensive lesson from the second quarter of 2020’s lockdown is that the measure, despite its effectiveness, which brought Thailand’s internal spread of the virus to zero for many months, resulted in a 12.1% economic contraction; six million unemployed and underemployed workers; an extra government debt of almost 327 billion baht from cash-handout programmes; and 887 billion baht of reduced consumption and investment. The country and the government cannot afford to face such economic catastrophes again.
The question now is can we really avoid the new lockdown? A leading Thai epidemiologist seems to think this is unavoidable. I am no epidemiologist but simple logic tells me that when the reproduction index exceeds
1, a complete lockdown is necessary. If the index is more than 1, it means that one infected person will transmit the virus to more than one person. In London and South East England, the reproduction index is currently 1.2-1.5, resulting in an explosion of cases.
Therefore, the strictest lockdown measures are being imposed in England. It is not time to think about the economy when the index exceeds 1. South Korea’s reproduction index has just touched 1.1 and the government immediately ordered a ban on gatherings of more than four people. The Japanese government might issue a State of Emergency order in Tokyo by the time this article is published as the index there clearly exceeds 1.
Even though Thai authorities never publicly announced the reproduction index, I can tell you a way to calculate it. A reproduction index of 1.2 means a 4% growth of new cases per day while an 8% growth of daily new cases reflects an index of 1.5. Readers can take the announcement of new daily cases and calculate the growth rate by themselves. I bet you the index is not 1.
Based on actual economic data from the second quarter of 2020, I have calculated that Covid-19’s impact on the economy is 887
billion baht in reduced consumption and investments, equivalent to 25% of quarterly GDP. In other words, consumers, on average, cut their spending by 25% in that quarter. The spending cut is the result of (a) less income, (b) reduced access to shopping outlets and eateries, and (c) fear of contracting the virus and fear of future income loss. I have further isolated the last factor and estimated that the fear factor is about 200 billion baht in reduced spending. Even with the lifting and easing of lockdown measures, this fear factor remains which induced a further spending cut of 197.9 billion baht in the third quarter and caused another economic growth contraction in that quarter. By the way, the fear factor is not all that bad. It kept Thai domestic reproduction index at 0 throughout the second half of 2020.
The reason the economy did not shrink by 25% in the second quarter of 2020 was due to countermeasures by the government, which gave out 327 billion baht under various support programmes, and by the Bank of Thailand allowing debtors to pause loan repayments, which was calculated to be about 300 billion baht. It is most likely that Bank of Thailand will, once again, extend the loan repayment holiday, which expired at the end of last year, to June 2021.
If they don’t, many banks will be in deep trouble. Unfortunately, given the current fiscal position and outstanding debt, big financial support from the government is not to be expected. If our government had money to spare like last year, I guarantee you that there would have been a new lockdown order by now.
If a certain Thai epidemiologist is right and the government has to order a complete lockdown of the country again, what would happen to the economy? The answer is it would be much worse than that of the second quarter of 2020. This time, consumers will be forced to cut their spending by more than 25%. Why? Here are the answers.
No significant monetary support from the government. Cash-handout programmes combined added an additional 10% of income to Thai consumers in the second quarter of 2020. Without those programmes, consumers would have likely cut their spending by 35% in that quarter, not 25%.
If the governor of Bank of Thailand is cold-hearted enough not to extend the loan payment holiday programme, Thai consumers will have to cut their spending by another 8.5%. But rest assured that Thai consumers will never do that because they prefer to keep the money for consumption and let themselves be NPLs [non-performing loans]. Therefore, I do not think the governor has any choice on this matter.
The last issue is the most important one: no more cash. No more savings. No more credit lines.
After a full year of negative growth in the economy, (almost) everybody is at the end of the rope and there is nothing in consumers’ wallets to help them make it through the second shockwave.
Conclusions? Pray hard? Well, maybe, (capable) economists can help.
‘‘ The expensive lesson from the second quarter of 2020’s lockdown is that it resulted in a 12.1% economic contraction.
Chartchai Parasuk, PhD, is a freelance economist.