Roadmap to post-lockdown optimism

5. Mar 2021

Emerging from the economic slump triggered by the pandemic has proved slower and more difficult than original estimates suggested. flow’s Janet Du Chenne and Graham Buck examine the evidence that suggests the long-awaited recovery may finally be underway

At the start of June 2020, as Europe’s improving Covid-19 statistics encouraged governments to start easing lockdown restrictions, flow considered the prospects for a return to normality in Exiting the Covid-19 ravine. A prescient Matthew Luzetti, Deutsche Bank’s Chief US economist cautioned “The return of economic activity is likely to be gradual.”

China has been among the few economies to achieve the much discussed V-shape recovery while India is swiftly bouncing back from a sharp recession, but for North America, Latin America and Europe, H2 2020 was less a case of exiting the ravine than falling back as a second wave of the pandemic and worrying new strains of the virus saw restrictions and full lockdowns reimposed. It was only at the end of the year that more positive news emerged, with evidence that developed economies have become more resilient to the impact of the pandemic and the roll-out of mass vaccination programmes underway led by Israel, the UK and the US.

The latter event renews hopes that the months ahead will be marked by a gradual return to normality as the major economies start to exit from renewed lockdowns. In Deutsche Bank Research’s white paper of February 9, dbDIG Global Macro Survey: Not as bad as 2020, but Italy and Spain lagging. US sees post-election relief, strategist Simon Carter examined in-depth macro consumer survey results from the bank’s Data Innovation Group. The survey took the pulse of eight major economies and assessed their consumer sentiment, employment and wage trends, consumer confidence, spending patterns and saving/spending intentions together with other indicators of recovery prospects.

Restrictions and impact on consumer sentiment

The steady lifting of restrictions and gradual return to normal economic activity may not assuage people’s uncertainty about their cashflows. The survey results confirm that people in Europe, the UK and the US have spent less during lockdown and have a benign view on the likelihood of running out of money over the next month. Heading out a further six months, that picture changes with people growing increasingly worried about their savings, reflecting uncertainty over just how quickly things will open up to allow a return to normal. Italy and particularly Spain remain standouts in terms of consumer concerns over cashflows (see Figure 1). Savings in these countries have risen as a result, most sharply in Spain, since September 2020.

Figure 1: Consumers’ concerns about running out of money

Source: dbDIG, Deutsche Bank Research. Note: Past survey trend data is available.

With many governments striving for a delicate balance between lifting restrictions to mitigate economic damage and containment to prevent a further resurgence of the virus, consumers’ expectations remain tempered. The ability to reopen gyms, retail outlets, restaurants and bars and regenerate spending depends on how well the vaccines work. On a positive note, Deutsche Bank Research’s Jim Reid points to studies adding to a growing body of evidence that the vaccination programmes are beginning to have an impact. He highlights research published in Scotland, which found that the AstraZeneca/Oxford vaccine reduced hospital admissions by 94% with a single dose four to six weeks after vaccination, while the Pfizer/BioNTech vaccine led to an 85% reduction. On top of this, a separate analysis from Public Health England found that a single dose of the Pfizer vaccine reduced the risk, also by 85%, of contracting the virus after the second dose.

Buoyed by the good news, the UK government reflected the cautious approach on 22 February with its step-by-step plan for the way out of lockdown. After the reimposition of restrictions before Christmas 2020 resulted in a slump in economic activity, the UK is now testing a roadmap approach to opening up ahead of all social restrictions being lifted on 21 June (summer solstice).

UK Prime Minister Boris Johnson said restrictions will begin to ease from 8 March, at which point schools will reopen. Reid described it as a “fairly cautious path overall”. Apart from schools, the ‘stay-at-home’ message will remain until 29 March, at which point people will be able to gather in groups of up to six or two separate households outdoors. However not until 12 April at the earliest will non-essential retail and gyms be able to reopen, along with outdoor hospitality, while indoor mixing between households will have to wait until at least 17 May.

In Italy and Spain the roadmap seems to point the opposite way towards tougher restrictions, with Italy announcing an extension of travel curbs between regions until 27 March, and authorities in France announcing a lockdown for the next two weekends in Nice.

In Germany, Bloomberg reported that the German government is considering a further €50bn in debt spending, or around 1.5% of GDP, with the report saying that Finance Minister Scholz would propose suspending the constitutional debt brake for a third year. Deutsche Bank Research’s Stefan Schneider and Marc Schattenberg expect a drop in GDP of about 2% in Q1 caused by a renewed lockdown-induced slump in private consumption by about 5%, but a strong rebound thereafter given the favourable global backdrop and German consumers’ pent-up demand.

Financial confidence rises in the US

While Italy and Spain lag materially in household financial confidence, it has risen modestly elsewhere in Europe and more sharply in the US (see Figure 2). Carter notes that the sharp rise in the US (and improved household income expectations) is perhaps buoyed by a change in the guard at the White House. In terms of restrictions, New York continues to ease curbs on businesses as theatres will be allowed to reopen in mid-March with reduced capacity. Meanwhile, the US government gave Moderna positive feedback to extract more doses of its Covid-19 vaccine from each individual vial it produces. This could expand supplies, which continue to trail demand dramatically.

Figure 2: Families starting to generally feel better off financially

Source: dbDIG, Deutsche Bank Research

Pandemic resilience

The growing ability of businesses and consumers to adapt to the restrictions of a pandemic was explored by Deutsche Bank Research analysts in the 4 February publication COVID-19 dbDIG survey: Adapting to life in lockdown. Based on the results of its household survey, several of the findings were relatively positive. While mobility remains limited, since spring 2020 and the first lockdown the link between mobility and economic activity appears to have weakened as the economy and individuals adapt to operating under lockdown restrictions and working from home (WFH) becomes the norm.

The euro area economy has proven to be surprisingly resilient to the most recent lockdowns
Deutsche Bank Research ‘Covid-19 dbDIG survey: Adapting to life in lockdown’

Second and even third lockdowns have not significantly affected productivity and hours worked, with both above the levels of the first phase of the pandemic. Apart from a post-Christmas lull in January 2021, consumer spending has also improved from the levels of the first lockdown. In addition, despite media reports of contraventions the survey across Europe found around 80% of respondents readily complying with measures to control the virus. “’Lockdown fatigue’ also does not appear to be an issue,” the report’s authors note.

Offsetting these findings survey responses (Figures 3 and 4 below) evidence that workers now feel more at risk from being made unemployed, while those who have already lost their jobs are pessimistic on their chances of finding new employment. As the pandemic has persisted, households generally feel that conditions have not improved since the first lockdown and continue to be downbeat about the outlook for the wider economy and their own incomes.

Figure 3: Workers feel that the risk of being made unemployed continues to grow steadily

Source : Deutsche Bank's dbDIG household survey

Figure 4: Unemployed workers see diminishing prospects of finding new employment

Source : Deutsche Bank's dbDIG household survey
Due to small sample sizes in each of the five countries surveyed, the respondents have been pooled together into a single series

Consumer spending: damage limitation

Shuttered high street stores might indicate a sharp fall on European consumers’ spending, but the survey of the four main Eurozone economies and the UK shows an improvement since the peak of the first lockdown when spending was down 5% to 9% year on year. However, since then the gradual reopening of stores, coupled with the introduction of furlough and other support schemes has seen spending recover to be 2% to 4% below 2019 levels as per Figure 5. According to the report “overall spending across the major European economies seems to have been robust to the introduction of the restrictions that were part of the recent lockdowns. The pickup in spending between the first and recent lockdowns has been broad based.”

Figure 5: Spending during the recent lockdown is still down on a year ago, but significantly improved on the first lockdown

Source: Deutsche Bank's dbDIG household survey

As regards spending on the so-called ‘big ticket’ items such as cars, furniture and major electricals as per Figure 6, respondents in France, Italy, and the UK appear most recently to have opted to delay purchases at about the same rate as just after the first lockdown, while in both Germany and Spain, more respondent are choosing the delay the purchase of a wider range of big-ticket items in the current lockdown relative to just after the peak of the first lockdown.

Figure 6: France, Italy and the UK were delaying big-ticket purchases at the same rate as after the first lockdown. Germany and Spain had more people delaying purchases.

Source : Deutsche Bank's dbDIG household survey

Less reassuring is consumers’ perceptions, with the survey evidencing that since the start of the pandemic more respondents think their family is worse off than a year ago – although the authors note that at least the most recent lockdowns have apparently kept the number stable rather than pushing it higher. Nor do respondents expect the economy to improve in the near term. “Ever since the first lockdowns, a net share of around 40% of respondents have expected the economy to get worse in the next three months,” the report states. “Again, the share did not seem to be significantly affected by entering the most recent lockdown.”

On household income expectations, around 10% of people surveyed expected their household income to increase over the year ahead rather than decrease. This is a higher share than during the first lockdown but still below the levels of the pre-pandemic period.

People expect the prices of goods to increase within the next year and to follow actual rates more closely (see Figure 7) notes the dbDig survey. 5−10 year inflation expectations are fairly in line as well, notes the research. Discretionary spending fell across Europe and US after the holidays, while short-term spending intentions are on the rise. Once again, in many cases, spending intentions are more robust than the first lockdowns during 2020

Figure 7: Consumers expect inflation to rise

Source: dbDIG, Deutsche Bank Research. Note: Past survey trend data for inflation expectations is available. Questions reintroduced this wave after last being run in March 2020.

Vaccine acceptance

Given the concerns over “vaccine refuseniks” reported by flow last month in “Will vaccines deliver normality?”, the report offers a further item of positive news. The results of the survey, conducted between mid-December 2020 and mid-January 2021 show a “significant rise” in the share of respondents willing to be vaccinated.

“Even in France, which by European standards is sceptical of vaccines and has had significant issues rolling out the vaccine, the share willing to get vaccinated rose up to the levels seen in other countries back in August and September [2020],” the report notes. With the exception of German respondents, there was also an increase in the number agreeing that anti- Covid-19 vaccines should be made mandatory.

“The improving attitudes towards the vaccine are a positive sign for the economic recovery,” the analysts note. “The faster governments are able to deploy the vaccine to achieve herd immunity, the quicker normality can be restored. When that normalisation does come, it might come quickly.”

A coiled spring

A quick return to normality would be particularly welcome in the UK, whose GDP for 2020 was reported on 12 February1 to have declined by -9.9%; the steepest drop since the ‘Great Frost’ of 1709. The country also one of the world’s worst rates of Covid-19 related deaths per million of population2.

At the same time, the UK government met a pledge to offer vaccines to 15m of its citizens deemed to be most vulnerable to the virus, raising hopes that the country’s emergence from lockdown might be accelerated. On 11 February the Bank of England’s Chief Economist, Andrew Haldane3 was emboldened to liken the British economy to a “coiled spring” poised to release “pent-up financial energy” and to be “firing on all cylinders” by the spring.

In his UK Blog of 16 February, How much could the government’s vaccine programme add to Q1 GDP?, Deutsche Bank Research economist Sanjay Raja reported that its vaccines procurement and distribution programme could add between 0.6-1 percentage points (pp) to the UK’s GDP for Q1 2021.

Figure 8: The UK government’s vaccines procurement and distribution could add around 0.6pp to 1pp to Q1 GDP growth

Source: Deutsche Bank, ONS

The sharp rise in government spending is not the only part of the programme that promises to boost growth. “Indeed, the effects on GDP are likely to be more widespread,” Raja suggested. “For one, manufacturing pharmaceutical activity is likely to pick up as a result of domestic vaccines production from AstraZeneca. And two, health activity is also likely to risen as hospitals and GPs start administering vaccines.

“Ultimately, while this will not reverse the expected GDP collapse in Q1, it could certainly soften the blow of the winter lockdown.”

Summary of Deutsche Bank Reports referenced

  • Early Morning Reid - Macro Strategy, 23 February, by Jim Reid
  • Focus Europe: Covid-19 dbDIG survey: Adapting to life in lockdown, 4 February, by Michael Kirker, Mark Wall and Simon Carter
  • dbDIG Global Macro Survey: Not as bad as 2020, but Italy and Spain lagging. US sees post-election relief, 9 February, by Simon Carter
  • UK Blog: How much could the government’s vaccine programme add to Q1 GDP?, 16 February, by Sanjay Raja
  • Data Flash Germany: Feb ifo index - Strong upside surprise provided by expectations, 22 February, by Stefan Schneider and Marc Schattenberg


1 See https://bit.ly/3bFz8A3 at markets.businessinsider.com
2 See https://bit.ly/3srRY4I at statista.com
3 See https://bbc.in/3bynTcO at bbc.co.uk

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