Seven weeks into the crisis and the numbers are staggering.
UK GDP looks set to fall -25% in the second quarter of 2020, the worst drop since 1709 when the ‘Great Frost’ occurred and ‘birds dropped out of the sky’ it was so cold. The US economy may decline -35% in the same period – worse than anything that happened in the Great Depression.
Last week it was revealed that UK retail sales fell over 5% in March – the worst showing on record. Meanwhile US unemployment claims have hit 26.4m in four weeks, a rate of 15% – again a spike like nothing witnessed previously.
The government plans to sell £225bn of bonds over the summer to fund the crisis, taking the UK budget deficit as high as 15% – never before seen in peacetime.
One can enumerate plenty of other statistics like this.
There’s a lot going on when the use of the word ‘unprecedented’ is itself unprecedented.
On the positive side the lockdown measures are starting to work. All European countries have started to drop away from the exponential line. If the lock down measures can be maintained for a couple more weeks, there is reason to hope that new case rates in Europe will start to fall rapidly and the deaths will also stop growing.
We need to see the new case rate fall to an average of below 10 new cases per million of population per day to get COVID-19 back under control, and this is possible within the next month, even in the USA which is about two weeks behind Italy.
Meanwhile the urgency to get the economy moving again cannot be underestimated, though the timing is critical – too early and we risk a second wave, too late and the economic damage will be too great to bounce back from, no matter how great the stimulus package.
At this stage, politicians are rightly focused on containing the outbreak. With the media counting every casualty, this is understandable. However, the debate needs to begin focussing on how to restart the global economy as soon as possible and avoid a recessionary spiral that will cost far more lives in the longer term.
There are some reasons to be optimistic. It is encouraging to see China relaxing restrictions in Wuhan and starting to get the country back to work. There is also growing confidence that some treatments are helping, most notably the use of convalescent plasma therapy, which was the most common way in which viruses were treated before vaccines became widespread.
Interesting evidence is also building to suggest that the proportion of very mild or asymptomatic cases of infection is much higher than previously thought, with testing of cruise ship passengers, survey data in Italy and current testing in China suggesting asymptomatic cases may be somewhere between 30-70% of all cases. If true, this would suggest the outbreak has already spread far wider than previously estimated with the positive implication that the mortality rate is much lower than currently understood.
From a market perspective, we believe the news-flow is likely to remain supportive of a continued recovery in markets. Q1 earnings have been poor, but that was expected. In terms of the full year impact on corporate profits, S&P earnings are now expected to fall 8% in 2020, versus an expectation of 7% growth in January – a downgrade of 15%. This assumes that the economy gets back to some kind of normality in Q3 and Q4. World governments remain committed to injecting massive stimulus, particularly on the fiscal side. Stimulus in the US is approaching 35% of GDP.
In terms of a roadmap for how we get out, it looks as if the world starts going back to work between May 8th and 15th or just after, at 75% capacity.
The staggered industry order would be: first construction… then manufacturing… then the retail, wholesale, and distribution industries. Pubs, leisure and flying look to be the last in the queue.
With a phased return to work we may be able to see an end to the crisis, as long as we don’t get a second spike and another enforced lockdown.
Governments will want to restore normality as soon as possible, rather than allow a recession mindset to get entrenched.
Some perspective is helpful in all this. The world got through the financial crisis, the Eurozone crisis, and September 11th before that, and hopefully we will get through this too without too much further mishap.
Just add ‘global pandemics’ to the list of investment risks, alongside slow growth, high debt levels and Brexit.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.
