Covid-19: The burden of proof is now on the optimists
- Reasons to be pessimistic mount as the pandemic progresses and our understanding of the virus itself increases
- Why so many positive 2021 growth forecasts when current trends indicate that new infections will double by year end?
- Unprecedented policy support means that downward growth revisions will not mechanically be reflected in markets
I, like everyone in finance, see lots and lots of Covid charts. Most of them are the same, with the only real difference being the branding and colours, and I mostly ignore them.
Thursday morning, John Authers included this chart in his newsletter, and I think that it matters:
Even without a title, I expect that pretty much anyone who has not been living under a rock since lockdown began would recognise that this shows the distressing rise in new positive cases of Covid-19. At the moment, c250,000 people globally are being diagnosed with the virus each day, and probably many more are falling ill, or have the virus asymptomatically, but are not confirmed as Covid cases.
So, if the chart is so recognisable, what’s so important? The trendline. Authers indicates that if you extend the linear trendline, we get to 500,000 daily new cases by Christmas Eve. Here’s a more sophisticated projection with error bars:
I’m not a Christian, so why do I care about Christmas? I care about Christmas because this is the time when most forecasters and politicians expect the global economy to be getting back in its swing, shaking off the pain of 2020 and returning to normal. And that’s certainly not going to happen if we have 500,000 new cases of coronavirus each day. Boris Johnson has said that he expects the UK to be back to “normality” by Christmas, but with this trendline, it seems that a takeaway and Netflix is the closest I’m going to get to enjoying a normal Jewish Christmas with Chinese food and a movie.
My Christmas celebrations aside, the real message is that the onus is now on the optimists to explain why the global economy will be in a position to grow consistently next year. Earlier this year, the path of the virus was far from clear, and many commentators, myself included, were optimistic that we could wake from lockdown hibernation quickly and get back to business. But that now seems increasingly implausible:
1) Many people have assumed that the fact that many countries have experienced renewed infections post-lockdown means that the virus isn’t seasonal, but the latest scientific research suggests that’s wrong: This will get worse in winter.
2) While it’s tempting to blame the renewed Covid outbreak in Australia on randy security guards in Melbourne hotels, the reality is that Australia gives us a preview of how difficult it is likely to be to contain the virus in the winter. When most business has to be done indoors, some people choose not to self-isolate despite having Covid-19 symptoms.
3) A similar resurgence in many countries in Europe shows the difficulty of containing the virus while reopening the economy.
4) The public health measures that are needed to contain Covid-19 fundamentally depend on social solidarity, which appears to be fraying in the UK and presumably many other countries as well. Absent strong social solidarity, future Covid-19 containment will be less effective, depending on enforcement by the state. Again Melbourne, which has upped its request for military help in fighting Covid-19, may provide an indication of what is to come.
5) While many people have pointed to Sweden to argue that they economic contraction was policy induced and that the economy can remain open despite the virus, high levels of social solidarity actually drove a high level of social distancing in Sweden despite choosing not to implement a strict national lockdown.
6) Meanwhile, new research on the US experience shows, unsurprisingly, that fear of the virus constrains economic activity regardless of lockdown measures. Not locking down and letting the virus run its course does not appear to be a viable route to economic recovery. Or, as the latest FOMC minutes put it: “The path of the economy will depend significantly on the course of the virus.”
7) We are nowhere near reaching herd immunity. Early optimism, including my own, was based on the hope that asymptomatic transmission would leave a large number of people with antibodies, hindering the spread of the virus. This sort of herd immunity requires 50-90% of the population to develop antibodies, but even in Sweden, with its strategy of controlled transmission, only 7.3% of residents of Stockholm had antibodies in mid-May, with lower levels elsewhere.
8) The only route to heard immunity is a vaccine because having the virus does not appear to confer long-term immunity. More evidence from Sweden suggests that immunity lasts for roughly six months, so, even if every country let the virus circulate as Sweden has, those who have had the virus would lose immunity too quickly for the percentage of people with antibodies to ever reach the herd immunity level.
What this means going forward is that anyone with an optimistic economic outlook needs a clear, convincing narrative about the virus. Back in March, it was reasonable to assume that this was a big problem, and it would be sorted out by the end of the year. Today, with the end of the year only five months away, that seems unlikely without a deus ex Machina.
Tanzanian President John Mangufuli argues that Christ is the antidote to Covid-19, but for most of us the only deus that could credibly descend ex Machina and save the 2021 economic growth forecast is a vaccine. I’ll be digging into this in future research, looking at how quickly the credible vaccine candidates can be rolled out and who will get the vaccine first. In the meantime, suffice to say that there are fivemonths left in 2020, two months until the northern hemisphere winter, 7.8bn unvaccinated humans and zero vaccines ready for commercial deployment.
I forecast downward revisions.
A note on markets: Being right for the wrong reasons isn’t always bad
Four months ago, I warned that investors should be prepared for a potential shift back to herd immunity strategies, leading us to come out of lockdown quickly and rewarding countries that adopted policies that facilitated hibernation. I also warned that investors should be cautious about moving to a risk-off position because markets could rebound quickly. I was wrong about the former, but right about the latter. Markets have recovered rapidly as the market has come to understand the virus better and central banks and ministries of finance have provided unprecedented support to both the economy and the market. While I expect growth to be revised down as the true scale of the virus becomes clear, if policy support continues on its current course, markets could remain buoyant through those revisions.
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