COVID-19: Economic Outlook

David Long
March 23, 2020

The battle against COVID-19 has reached a critical stage and while the news headlines are dominated by the rising daily death toll and appalling situation in the worst hit countries like Italy and Spain, financial markets have stabilised and the mood has shifted from fear and panic to a calmer assessment of the implications for the post-COVID-19 economy.

The FTSE 100 has actually traded sideways then slightly positively for the past two weeks. Crucially, despite the constant flow of bad news, the market has not returned to the low of just under 5000. It did not help to have the Prime Minister, the Health Secretary and the Chief Medical Officer all go down with the virus on Friday, but even then and with more difficult headlines over the weekend the FTSE is still hovering around the 5500 level.

At least for the moment, the selling pressure appears to have been exhausted. Financial markets are forward looking and the market has already priced in much of the daily newsflow, bad though it is. What is unknown is how long the economic lockdown will last for and what progress will be made on testing and treatments.

Across Europe we are seeing the first tentative indications that the rate of new infections is reaching its peak and data from the next few days will be crucial to confirm this. If so, this will mark an important milestone in the management of this virus and greatly informs the statistical models used by the academics and health organisations. This in turn should enable much more precise forecasting and more effective control of its progress.

We are also seeing an extraordinary expansion in the capacity of health services to be able to cope, particularly in countries that have had long to prepare. The UK for example is bringing on stream field hospitals with the help of the military; such as the 4,000 bed NHS Nightingale in London’s Excel centre and similar projects in major cities around the country. Remarkably some 20,000 former NHS staff have returned to work in the past couple of weeks to help man these new hospitals and fight the virus.

Significant progress is also being made in the development of testing and treatment. Abbot industries have developed a simple COVID-19 test that gives results within 30 minutes. Of course it will take time to ramp up production, but this would be a game changer enabling people to confidently and quickly determine if they are infected and to self-isolate early before spreading the virus. Similarly the UK is expecting to start conducting antibody tests later this week, to identify those who have built up some immunity and can safely go back to work.

The production of ventilators is increasing dramatically with a consortium of business groups including Smiths Group, Rolls-Royce, Airbus, Thales and BAE Systems all involved in efforts reminiscent of a wartime economic push. The NHS currently has 8,000 ventilators but is expecting to double this number over the next few weeks and has targeted a total of 30,000 machines.

University College London engineers working with UCLH and Mercedes F1 have developed a new simple device to maintain Continuous Positive Airway Pressure (CPAP) delivering oxygen to the lungs without the need for a ventilator. These devices will enable less severe cases to be treated effectively without the use of a ventilator. If trials go successfully this week, Mercedes expect to produce 1,000 CPAP machines a day from next week. An extraordinary achievement.

Similar developments are progressing across the world and it is becoming clear that our capacity and ability to manage the spread of the disease is increasing extremely rapidly, even before the potential for new treatment drugs and the longer term hopes for a vaccine become a reality.

Cumulatively these developments open up the real prospect of moving into the next stage of managing this pandemic with a gradual return to work, albeit with continuing social distancing measures in place for many months. The pressure on politicians to get the country moving again will start building rapidly and we anticipate some relaxation of the current lock down measures by the end of April. However, it is likely that we will see mini-lock downs throughout the summer as the spread is managed and contained.

The economic fallout from this will still be extreme – perhaps the most severe contraction in global economic output ever recorded. Against this, governments and central banks have announced stimulus measures totalling some $5 trillion dollars and crucially have promised to do whatever it takes. This is a fiscal and monetary intervention on a scale never witnessed before and while in the short term it has been vital to stabilise economies, the longer term implications are harder to assess.

If and when COVID-19 is finally brought under a degree of control, it is possible we will experience a very sharp market recovery as economies spring into life and all that excess money supply floods into stocks. At present the balance of risks is evenly poised and we must expect continued volatility as events play out over the next few weeks.

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.

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