May 18, 2020
Why this won't be a symmetric shock
The first Covid-19 outbreak seems to be subsiding, but the epidemic is far from running its course. Regardless of government-enforced containment, individuals and firms are likely to change their behaviour to reduce contagion risk. And this will have implications for economic activity. Some economic sectors such as tourism or retail will be affected more strongly and for longer. And this will have an impact on employment. Not every country or region in Europe is equally exposed to these developments. A short paper in the latest BIS bulletin concludes that the unemployment risk from Covid-19, by region in the EU, is highest in France and the Mediterranean countries, lowest in northern Europe, and intermediate in eastern Europe.
Sebastian Doerr and Leonardo Gambacorta use two factors to estimate their employment risk index: the first category includes exposure to trade, transportation, food, leisure, and household work; the second is the share of firms under 10 employees. Neither correlate well with their indicator variable of google searches for unemployment, but the combination of the two does. Having fewer small firms seems to protect countries like Germany and especially the UK in this case.
It is interesting to compare the estimated risk with the severity of the current outbreak. Italy, Spain, and the UK have had bad outbreaks and are estimated to be highly exposed on the basis of economic sectors, whereas France has been hit by the epidemic but isn't so exposed on the basis of economic activity. France is economically vulnerable because of its high share of small firms. Generally speaking, though, the economic sector factor seems to correlate with vulnerability to outbreaks. It looks like this crisis won't end up being a symmetric shock after all.