13 March 2020

The Covid-19 pandemic appears to be moving into a new phase. While the response differs between countries, most governments are transitioning from the contaiment phase towards focusing efforts on delaying the spread of the disease. This strategy hopes to lower the peak number of infections. The plan seeks to buy time; thereby, reducing the strain on stretched health care systems, providing space to develop a vaccine, building immunity, and ultimately limiting mortality until the disease is successfully controlled.

Of course, I am not a scientist (perhaps a “dismal scientist”). This is the second in a series of blogs I am preparing on this crucial topic. Yesterday, I warned of the economic and health risks posed by the lack of testing in the USA, and the relatively complacent approach of the Trump Administration to addressing this pandemic. Like government policies, financial markets appear to be entering a new phase: panic. In a later blog, I will consider the economic implications of the outbreak. The shelf-life of such forecasts these days is short. Today, I aim to present a few building blocks that will allow more informed economic and market forecasting.

Is this the Flu?

I hesitate to even pose this question, but the comparison between the Coronavirus and the normal season flu still arises in key policy debates and casual conversation. The Table above compares Covid-19 to other pandemics and annual influenza. Covid-19 is far more infectious than the flu, as signaled by a higher R0. This metric measures the number of people infected by one infected individual. Indeed, while not as infectious as SARS, Covid-19 ranks high on this list. Unlike SARS and Ebola, however, coronavirus can be spread by infected people who are (and never will) show symptoms. Consequently, the risk of “community spreading” of Covid-19 is much higher.

Likewise, Covid-19 is much more lethal than seasonal flu. I will discuss mortality rates in more detail later, but currently fatalities are running over 3%. Most experts believe this ratio will decline. But, even at 1%, the current disease is 10 times more deadly than seasonal flu. Fortunately, it’s much lower than SARS and MERS. Nevertheless, the death count could rise substantially in the absence of effective public policy, given the expected rise in the number of infected people.

How Long Will the Outbreak Last?

I reiterate, I am not a scientist. Recent financial market behaviour, however, indicates investors are deeply uncertain about the outbreak’s duration. And, to project the economic costs of the crisis, we need guidance. Many experts point to the similarities of SARS and Covid-19. So perhaps, the SARS experience will give some clues. The Chart above illustrates the number of cases peaked after about 5 months or so.

China’s recent experience may lend some support to this timing. The outbreak in Wuhan probably began in November 2019. As a result of China’s draconian containment efforts, confirmed cases are nearing a peak 4 months later. We will need to observe if Chinese cases reaccelerate when the extreme quarantine measures are eased, and people return to work.

Meanwhile, the Chart above illustrates that cases outside China began to accelerate in mid-February. This suggests new cases may peak this summer — a conclusion the public policy “delay strategy” is relying upon. So, indeed, the economic impact will be significant, but temporary, e.g. lasting into Q3 2020. Of course, there’s great uncertainty surrounding this projection. Market confidence will not return until non-Chinese cases peak, and until we know if the Chinese outbreak reaccelerates.

Mortality: Learning Some Early Lessons

Gauging the mortaility rate of this outbreak is necessary to assess the strains on health care systems, business and consumer confidence, and labour suppy (“dismal” scientists must consider dismal issues). Currently, the fatality rate is over 3%. Fortunately, much lower than SARS and MERS, but well above the seasonal flu and the 2009 swine flu pandemic. Likewise, the current rate is likely overstated, as the number of cases (the demoninator) is probably considerably under-reported at present. But, even at 1%, that could result in a large number of additional deaths unless action is taken.

What lessons can we learn already from the recent outbreak? The Chart above illustrates the death rate in Wuhan and China’s Hubei province is sharply higher than the rest of the country. Clearly, containment strategies do work. While most countries would/could not replicate China’s draconian tactics, other nations should not abandon containment efforts, even as the strategic focus shifts to delay.

Secondly, as older people are most at risk, one would expect the mortality rate to be higher in countries with large elderly populations. The Chart, however, suggests that is not necessarily the case. The mortality rate in Germany and Korea is low, while the ratio is high in Italy — all have large aged populations. On the other hand, Iran’s youthful demographics have not prevented an elevated death count. What appears crucial is the effectiveness of public policy interventions, including testing. That’s one reason I raised the concerns about the lack of testing in the USA.

Of course, the quality of the health care system will be vital. Indeed, the relatively lower fatality rate in Germany, the UK, and France reflects robust systems. The experience of Italy, however, indicates that even high-quality care may not be enough. While the US health care system is very good, the lack of universal, free access will pose special challenges in the months ahead.

Implications

• The economic shock will be temporary, but significant. I will provide more details next week. However, the impact is likely to extend into Q3 2020. While I do not think the slump will be as long as following the Global Financial Crisis, the initial hit may replicate that of early 2009.
• Financial markets are unlikely to recover sustainably until the case count peaks outside China, and we can observe what happens as China goes back to work.
• Financial markets are in a state of panic. Meaningful difference exist between 2020 and 2009. If the economic slump is temporary, markets could snap back sharply later this year (more on this later).