16 April 2020

COVID-19’ Epidemiologic and Economic Impact

Analysed in just a few gobbets for time-starved, over-solicited decision-makers

 Several of the countries in Asia that had become the international gold standard in terms of
containment efficacy (most notably Singapore) are currently victims of a second wave of Covid-19
infections. Having successfully contained the first wave of the outbreak and assuming the
situation was under control they are now being forced to return to near total lockdown. This
scenario crystallises the magnitude of the challenge that getting back to a normality
represents.

 It also corroborates the conviction of many experts that we’ll experience multiple waves of
Covid-19. The image of the pandemic as a parabola that we so often see in the media is
misleading: throughout history, epidemics have evolved in the form of multiple uneven hills. As
soon as containment measures are relaxed, the virus tends to come back, sometimes in an even
more virulent form than in the first wave.

 For this reason, the obsession with when the lockdown will come to an end and restrictions be
lifted is misplaced. The question that matters is not: when will we reopen, but how things will
reopen. In each country, different industries and businesses will reopen at different times under
complex rules (about hygiene and physical contact with colleagues and clients in particular) that
will render their execution exceedingly complicated and onerous. The industries last to reopen will
be those that gather people together in large numbers and/or confined space (sports, conferences,
cultural events, travel, etc.).

 A full return to “normal” cannot be envisaged before a vaccine is available, in Spring 2021 at the
earliest. The reason is not ‘science’ (there are already multiple trials underway), but production.
Manufacturing billions of doses constitutes the real challenge that will require a massive
expansion and diversion of existing capacity. There is then the political challenge of vaccinating
enough people around the world (we are collectively as strong as the weakest link) with a high
enough compliance rate despite the rise of anti-vaxxers.

 According to the IMF, we’ll experience in 2020 the worst global economic contraction since
the Great Depression of the 1930s, with output losses “dwarfing” the global financial crisis that
started in 2008. The IMF projects a partial recovery with above-trend growth rates in 2021, but the
level of GDP will remain below the pre-virus trend, “with considerable uncertainty about the
strength of the rebound.”

 In our opinion, sell-side economic forecasts and bullish financial markets fail to appreciate the
extent to which losses in real income and the rise in unemployment will impact consumer
spending: in the coming years frugality and precautionary savings will inevitably prevail.
These changes in consumer behaviour will also be fuelled by the growing disparity between (a
few) winners and (many) losers, greater indebtedness, and the sharp increase in bankruptcies.

 Governments are intervening in a most forceful way to cushion the shock. At the beginning
of this week, they had already committed globally USD10.6 trillion (more than 10% of global GDP)
of stimulus to (1) support the basic needs of some citizens, (2) help business survive and (3)
preserve existing jobs. Greater government intervention accompanied by industry and company
bailouts will come with strings attached that will progressively redefine our social contracts and
reconfigure the way our economies work. The EU has a plan that gives a sense of this: private
companies given equity injections by EU member states as a result of the pandemic crisis will not
be allowed to pay out dividends, buy back shares or provide bonuses.