Brexit – what is Boris’ next U-turn?

If there is one behaviour which has characterised Boris as Prime Minister, is the frequency of U-turns. The major one last year was giving in to the EU on Ireland so he could get a Withdrawal Agreement passed. This year they have mainly been on Covid and exams for schools but I am now wondering what his Brexit U-Turn could look like.


Current Brexit situation

Without an agreement on the terms of a trading relationship, we will have a no-deal Brexit at the end of this year. This is not as serious as a no-deal Brexit would have been last year because now we have the Withdrawal Agreement. While we would not have trade agreements with the EU or any of the countries with whom we trade under EU’s trade agreements, we would also not be a rogue state reneging on our international obligations and agreements.


Pervious Brexit negotiations

The UK is acting like there can be a last-minute deal and the way to get there is brinksmanship. This was the case last year with the Withdrawal Agreement which the EU had already drafted. Talks were taken to the brink requiring either the EU to back down, the UK to back down or we go over the cliff edge. In this instance it was the UK that caved in, agreeing to a border in the Irish Sea and some commitment to EU’s level playing field rules in any future trade agreement. The EU had a draft we could sign, and Boris eventually signed it claiming victory and that the EU backed down.


Can the UK just cave-in again?

One path that many think likely is that Boris takes negotiations to the brink, then at the last-minute U-turns, agrees with the EU’s position, signs an agreement and claims victory.

But there is a serious problem with this idea. In contrast to the Withdrawal Agreement, there is nothing to agree to. There is no such draft of a trade agreement and there is not going to be one. The negotiations are the method by which the draft can be written, and these are not happening.

Why are talks making no progress?

The sticking point is the level playing field rules.

The UK signed up to them in principle in the political declaration of the Withdrawal Agreement but is now saying that they did not really mean it. The EU takes the declaration seriously and has based its negotiating position with it as a starting point.

Another way to think about this is that the UK and EU want to have very different types of agreement. The EU wants an overall governance structure into which all the detailed issues can be placed and resolved. The UK wants piecemeal agreements with much less overall governance or enforcement structure.

What deals are possible?

The table below lays out how I think the EU sees the options:

screenshot_2

  • Status quo is the one they want to negotiate. Zero tariffs, zero impediments to trade (such as regulatory and standards barriers) with a full level-playing field agreement.
  • No Deal is another simple option on the table, without level-playing field agreement, and the UK operates as a 3rd party country under WTO rules.
  • Canada-style agreement with some level-playing field provisions and some reduction in tariffs and barriers to trade is another option. The EU’s position is, given the geographical proximity of the UK, the level-playing field provisions would need to be more stringent that they are with Canada. The process of negotiating such a mixed deal is very complicated with many technical issues and perhaps even more complex political ones. For example, the Canada deal negotiations with the EU started in 2009 and are only recently being finally ratified. This timeframe is common for this type of deals as we saw with the Trans-Pacific Partnership deal which started in 2008, was agreed in 2015 and then Trump withdrew the US before it was implemented.

What does the UK appear to want?

The UK’s position appears to be zero tariff, zero impediments to trade and zero level-playing field.
(The ‘have cake and eat it’ option)
This is not something the EU is willing to entertain which is why the negotiations are stuck.

Which way will Boris jump?

If Boris is going to do another U-turn and agree to the EU’s framework then he needs to do it soon. This is not something that can be drafted and ratified in December. By all accounts Boris is not focusing on this issue and in this regard no-deal looks the most likely outcome.

3 paths forward for the economy

The pandemic is affecting the entire world, but we are seeing very different approaches to dealing with it in different countries. I have identified 3 broad strategies each of which will have very different outcomes in terms of the economic outlook. In this post I am not looking to evaluate the approaches from an ethical or public health perspective, but purely on what the likely economic results will be.

Path 1 – Control the Virus e.g. New Zealand

This is the approach I have been advocating and which I spoke about on my recent IAN talk. Please click below if you are interested in watching.

https://us02web.zoom.us/rec/play/vcUpIuyqq243GdPA4QSDB_NwW460f_2s2yJN_adfzh7kBiECN1ahb7QRYObZgJqcT5PkXmHALrgTT-6W?autoplay=true&startTime=1589914624000

This approach has been very successful at controlling the virus in some countries such as New Zealand, Norway, Singapore, China and Australia. All of these countries now have low levels of infection and can look at a material reopening of their economies. Other countries have been trying to play catch up, are past the peak in their infections and are maintaining lockdowns until the level of infections comes to a low level. This group of countries includes Canada and most of the EU.

This has not been an easy path to follow and for it to be successful it does not only take the good public policy but also it critically requires huge public support for measures which involve massive changes in behaviour. The countries that have been successful have given clear and detailed public health messages which have been adhered to due to high levels of public support and trust in the country’s government and institutions.

The economic impact of COVID has been very severe but these countries are the most likely to hope to experience COVID as being economically similar to a natural disaster and see a sharp rebound in economic activity. Bernanke, ex-Chairman of the Federal Reserve in the US, likened COVID to a snowstorm. In a snowstorm, we halt much of the economic activity but once the snow melts, we can go back to how we were before.

Waiting until the level of infection is very low has two big economic benefits

  1. The number of people infected is low, which means that anyone you interact with is highly unlikely to have the virus and so all the allowed activities are in effect very safe. This means people are confident to go back to work and do the allowed activities as you reopen.
  2. There is room to experiment with the reopening and how it impacts R0. If the impact is larger than you expected for an activity, then you have time to reverse the policy as the absolute number of infections remains very low. There is no danger of the virus getting out of control quickly.

With COVID the world will not be the same as before, but it may be possible to reopen large parts of the economy while keeping the rate of transmission and level of infections low.

Path 2 – Herd Immunity e.g. Sweden

I have used Sweden as my example but at the moment, to be honest, it is my only one and is a global outlier. It is the only country I know which has chosen to follow this path with high public approval and consent which makes all the difference to the potential economic outcome.

The choice to manage the spread of the virus with the longer-term goal of herd immunity is clearly possible. The economy is not shocked by the strict lockdowns and only a milder form of restriction is made to slow rather than to reduce the virus. Sweden has high levels of public support with 70% of the population supporting its government’s approach. With public trust and support the economy continues to function with a far milder slowdown in economic activity.

The data from the antibodies tests in Stockholm last week were broadly in line with my expectations but completely shocking to the Swedish authorities. With only 7.3% of Stockholm residents testing positive for the antibodies we can imply a mortality rate of 1.5-2.0%. This is slightly higher than the results from New York, France, Spain and the UK which all suggested 1.0-1.5% but I would suggest is within a margin of error given the relatively small sample size.

From outside Sweden we might think that this result would lead to a change in policy and a dramatic fall in public support but so far this does not seem to be the case at all. This implies that Sweden is uniquely happy to follow this route and I cannot say that the economic outcome should be poor. Whether it is better or worse economically than the path chosen by other countries such as Norway is not clear yet, but I see no reason to think it materially better or worse.

While I said that Sweden is my only example of herd immunity with broad public support it is not my only example of a country pursuing this strategy. A good example is Brazil where the government under Bolsonaro has deemed COVID to be “a little flu” and will not pursue any public health measures. But the population is not supportive of this plan which will lead to severe economic disruption. Without consent the population is afraid and so its behaviours change, both on the supply side as people do not want to go to dangerous workplaces, and on the demand side as a lack of confidence leads to a decline in spending and investment.

It is important to note that from a public health perspective Path 2 is the default strategy. Anything less than a strongly concerted effort to control the virus will make it continue to spread and grow. But going down this path with consent like Sweden has a very different economic outcome to doing it without consent.

Path 3 – Neither of the above e.g. UK, US

This occurs when there is a major divide between those who want to follow the two paths above. A majority of the population would prefer to take Path 1 and control the virus but a significant minority, including the government, prefer Path 2 to reopen the economy even if the virus is not controlled. This is the situation in the US and increasingly clearly also in the UK.

For both the US and the UK we went into lockdown late, made the lockdown not very strict and are moving to ease restrictions before the level of infection is low and declining. There has been some attempt to control the virus, but it has been half-hearted and thus ineffective.

Trump gets pretty uniformly panned in the UK for his approach but in a way, it has a certain brutal honesty to it. He does not really pretend that he cares about public health, he is very clear that he cares about the economy. He does not argue that it is safe to reopen, he argues that the economy comes first. The US public has a majority in favour of controlling the virus but has a significant minority that strongly prefers Path 2. Those people are also Trump’s support base and so politically it should not be surprising that he is pursuing a policy path which they support even if a majority of the broader country do not. Trump has never really been a President who wanted to govern for everyone, he governs for his base and his interests. It remains to be seen if he can generate widespread support for his approach.

The UK political landscape is somewhat different. We have a clear majority in favour of following Path 1 but again a significant minority who prefer Path 2. Looking at the opinion polls I do not see the strong divide in the country we had with Brexit. 73% of the UK population wants clear advice with detailed guidance, not the muddling appeal to “common sense” that we are getting. It is true that Conservative voters, Leave voters and older people are more likely to want to reopen earlier but there is a majority in all categories for a focus on public health and caution on reopening. But importantly the relatively small minority who are very keen on a rapid reopening are the small subset who are the type of people who are members of the Conservative Party and also the type of people who are Conservative MPs and in government.

https://docs.cdn.yougov.com/oygox62yaw/YouGov%20Covid%20Lockdown%20Results%20May%202020.pdf

I am sure there are many in the UK government who passionately want to follow Path 1, perhaps after his ICU experience that even includes Boris Johnson. But we also have Dominic Cummings who showed what he thought of the “Stay at Home” slogan by travelling 250 miles to Durham, and Rishi Sunak who is arguing for a swift reopening.

The effect of a split in government and a lack of clear direction is that the default strategy of letting the virus run away again becomes the effective policy. This is in effect the same policy that Trump has adopted but confusingly the rhetoric is entirely the opposite. When Trump argues for reopening, he talks about individual liberty and the economy. When the UK government argues for school reopening it does not say what everyone knows i.e. it is an economic priority. Instead, Gove tells us it is “safe”, and Williamson uses emotional blackmail on teachers to tell them their pupils need them. This contradiction between rhetoric and reality leads to further erosion of public trust.

To follow Path 1 the government needed to build a consensus in early March for measures which the public initially did not think we needed. It could still attempt to use the majority support for prioritising public health now to try again to make more effective policy. Instead, it is using the rhetoric of public health to sell the policies of reopening. Even now the slogan is

“Stay Alert – Control the Virus – Save Lives”

This is a slogan for Path 1. But all the policies are moving towards Path 2. I do not think this has a good outcome. The result will not be the economic recovery they hope for as without trust and security our confidence is so impaired that no recovery is possible.

If we combine the rhetoric of a government focused on controlling the virus, with the actions of a government that will not do so, I expect to see both a rising infection rate and also a misfiring economy. In this case, perhaps the government will admit its mistakes and refocus on being effective in controlling COVID. Or perhaps they will claim they have done everything they can, that controlling the virus was not possible as people did not “Stay Alert”, and we should move down Path 2.

Which of those sounds more in character for this government?

Does policy matter?

It is all too easy to become fatalistic when faced with a massive problem like COVID-19. One could just assume that there is nothing we can do; all the deaths and economic destruction are inevitable and we just have to get on with things. I do not agree. Good policy is possible and the contrast between the approach of the UK and NZ is a useful demonstration of this.

The chart below compares actual daily deaths in the UK (orange) with a projection for the next few months (blue). The timing and size of the initial peak were dictated by the decision to go into lockdown on March 23rd. As inputs to the projection, I allow R0 to stay around 1 for a few weeks and then creep up to 1.3. From early June daily deaths begin to rise rapidly again; if we want the next peak to be at a similar level to the last, then a further lockdown will be required soon.

As an alternative scenario, let’s look at the model if we had gone into lockdown on March 9th. This was the date that Italy went into lockdown whereas here in the UK, Boris Johnson spent the Daily Briefing explaining that he was still shaking hands with everyone, including COVID patients in hospital.

Blue again is the model, this time based upon the earlier lockdown assumption; orange actual deaths in the UK. The difference may appear shocking but comes directly from the exponential growth of virus cases. As opposed to peaking around 1,000 deaths, we would have peaked at below 200. Rather than the current many hundreds of deaths per day, we would have perhaps 10.

This exponential growth has some simple intuition around it. Early on during the 2-week period when we were told to wash our hands, but not to socially distance or stay home, I estimate R0 to be 2.0. R0 of 2 means the number of infections doubles every 5 days – therefore in 2 weeks the number of infections would double 3 times i.e. 2, 4, 8 –2^3. If instead the R0 were 0.8, then the number of people infected would change by a factor of (0.8)^3 – which is to roughly halve. Comparing these, entering lockdown earlier would have halved cases rather increasing by a factor of 8 – a total of a 16-fold impact on the number of cases. This is why the blue line above is so much lower than the orange line.

The impact of this decision has not just been seen in the extra tens of thousands of deaths, it also makes a huge difference in how we can loosen the lockdown. In the projection above, I still assume a post lockdown R0 of 1.3. If the overall level of infections is much lower, then in absolute terms the growth in the virus is hugely lower. This would mean we would have far more room to experiment with lockdown easing measures such as school reopening without risking an imminent large outbreak.

This scenario shows to me that policy choices really matter. The example of NZ where they did exactly this shows that it is possible in the real world. They went into lockdown BEFORE they had their first death from COVID. The infection levels were low and now they have effectively eradicated the virus with a total of 21 deaths. This is why the UK government does not want to talk about international comparisons or mistakes they have made. We had plenty of warnings and examples from other countries on what we should do, but the UK has made catastrophic policy decisions that have cost tens of thousands of lives and made it hard to contemplate the removal of the lockdown. However, we do not have to continue making terrible decisions and better policy is possible.

Model update

We have had some higher quality data recently which we can use to compare to my model assumptions and projections

Update on Mortality Rate

I used 1% in my models from early April. This still looks a good estimate but now I think rather than the range being 0.5-1.0% it is perhaps 1.0-1.5%

The reason is that we now have had 3 high quality pieces of data from large samples of people from areas of high infection to see how many people have been infected. I have already written about the New York results which suggested something a little over 1% mortality rate. Spain found that 5% of its population have had it and France 4.5% In Spain this result means that if we just take the raw COVID death data we have a mortality rate of 1.1%. If we take a more reasonable assumption that this data is underreported and use the excess death data instead then the true Infection Mortality Rate would be perhaps 1.4%.

I used the updated mortality rate of 1.1% to relook at the path of deaths in Spain and from that estimate what R0 must have been.

To get this fit we need an R0 of close to 3 early in the infection, dropping to 2 as people became aware of the pandemic and then to 0.8 after the lockdown on March 13th. This is the same as my models from last month.

Update on R0

Public Health England has recently suggested that the overall R0 in the UK is currently just below 1 which is a combination of being far below this in London (perhaps 0.4) and likely above 1 in other parts of the country such as the North East.

Source: FT

Since we are relaxing lockdown it seems reasonable to project that the R0 will rise from here. In the projection below I have put the future R0 at just 1.2 and if we want the next peak in deaths to be the same as the last one then we would need to go into lockdown in early July i.e. about 6 weeks’ time. Then we would come out of lockdown again in early September i.e. we spend more time in lockdown than we do in periods of minor easing and we never reach Boris’ Phase 2 of further easing of lockdown restrictions.

Is there a more optimistic projection?

To be much more optimistic we need to find a way to limit transmission without going back into lockdown. We must find more targeted ways to change behaviour rather than the very blunt tool of making us all stay inside our homes. This could be Test, Trace and Isolate or better public information on how to limit transmission.

How else could the projection be changed?

The simplest way is that policy is different. If lockdown becomes more severe then the R0 never rises and deaths keep falling. If instead we choose to carry on along Boris’ path of further lockdown relaxation then the R0 would be higher again and the number of deaths would rise far more rapidly. If we choose not to go back into lockdown then the number of deaths just keeps rising exponentially.