Covid Second Wave: Bracing For a Long Winter

22 October 2020

The long-anticipated Covid second wave is here (third wave in the USA). Experts project, correctly I suspect, that as winter arrives and activity heads indoors, the rate of infection will accelerate significantly further. In the United States, for example, I would not be surprised if daily new cases rise from 50,000 to 150,000 at some point in coming months.

Financial markets need to assess whether the health and economic consequences will be dire as during the initial outbreak. So far, markets have taken heart from the implementation of large-scale fiscal and monetary stimulus and impressive scientific progress towards development of effective treatments and a vaccine. Indeed, I work under the assumption that a vaccine will have emerged by early 2021, and will have been widely disseminated by this time next year. Even so, although I still expect the economic recovery will be quicker than following the Global Financial Crisis (GFC), I now project the output lost during the recession will not be recouped fully until mid-2022 (rather than year-end 2021).

Eventually, investors will need to give closer consideration to the potential long-term economic consequences of the pandemic. To be sure, such an assessment will be a complicated, and answers will emerge only over time. However, important distinctions are likely to emerge from an analysis of both the level of infection and the handling of the pandemic in individual countries.

Long Covid: Economic Impact May Linger

The Chart above illustrates that the momentum behind the initial phase of the V-shaped rebound is slowing (the Chart depicts the USA, but the pattern appears elsewhere also). PMI surveys reveal the pace of recovery is flattening in both the maufacturing and service sectors.

Dramatic fiscal and monetary stimulus — significantly larger than following the GFC — are responsible for the early economic bounceback. Additional measures will assuredly be necessary in the next six months to ensure the recovery continues. Indeed, European governments have already extended labour market furlough programs into 2021. However, intense political haggling in the USA and UK (and elsewhere) over the terms of additional support indicates that decisions are becoming more contentious as debt burdens rise.

The Chart above indicates that the scale of the fiscal boost differs widely across countries. In Europe, finally, Germany has provided leadership. Programs in the UK, Netherlands, Sweden and elsewhere have been impressive. Despite low levels of infection and high debt levels, Japan has turned on the taps. Efforts in other European countries with high post-GFC debt levels have been more cautious, despite widespread Covid exposure (e.g. France, Spain, and Belgium).

Noteably, China’s fiscal boost has been relatively modest, perhaps reflecting its lower level of Covid infection, as well as the legacy of its post-GFC spending spree. While the United States’ overall package is a bit smaller than some European countries, the direct impact of tax cuts and government spending is the largest in the world.

In beginning (and it is just a start of a long discussion) to consider the longer-term economic impact of the pandemic, geographic distinctions can be observed about the spread of Coronavirus. While such scrutiny may be politically painful, lessons will need to be learned.

First of all, it is hard to avoid the unpleasant conclusion that the United States has suffered greatly during the pandemic. The two Charts above illustrates that America has experienced the highest level of infection (as a percent of its population), and its level of mortality is also one of the world’s highest. By contrast, Canada has encountered one-fifth the level of infection and less than half the number of deaths (as a share of the population) compared to its neighbour. Brazil’s performance has been shocking.

Meanwhile, the experience of European nations has differed considerably. Spain, France, Italy, United Kingdom, and Belgium have endured the highest level of infections and deaths; followed by the Netherlands and Sweden (relecting its decision not to lock down the economy). Germany, Austria, and most Scandinavian nations have fared considerably better.

There have be other key other relative success stories. Reflecting their past experience with pandemics, Asian nations have experienced much lower levels of deaths and infections. New Zealand’s and Australia’s performance also warrants high praise, and extensive reflection. I will leave it to the experts to identify reasons for such widely varing national experiences. Geography may have played a role: but, island-NZ fared much better than the UK. Ethnic, social, and demographic distinctions have been crucial. And, the pandemic has exposed the the impact of inequality in many nations. From an immediate policy perspective, the Chart above illustrates the key role of testing. To be sure, no nation was testing enough at the outbreak of the pandemic. But, nations with more extensive testing and that locked down earlier — Germany, Norway, Canada, NZ, Korea — fared better than those less prepared — USA, UK, Netherlands.

As a simple economist, I assess the pandemic’s long-term consequences by monitoring productivity trends, labour force participation, and capital spending. In the GFC’s wake, all nations have had anemic productivity growth. The pandemic’s impact on national health, education (both the quantity and distribution), and extended unemployment will continue to depress efficiency gains, and may contribute to higher levels of inequality. Employees’ reluctance to return to work may depress labour force participation for some time. Moreover, the need to eventually deal with rising government debt will be a headwind to GDP growth. In sum, following the initial economic recovery, GDP gains are likely to be paltry for several years even after the pandemic ends.

Second Wave: Better Prepared?

To be sure, the second Covid wave has begun. However, the Chart above makes some distinctions (which are subject to rapid change). In Spain, UK, Netherlands, France, Belgium, and Czech, the renewed surge already has produced higher levels of new cases than at April’s peak. Meanwhile, while rising, new infections remain lower than in the first peak in Germany, Switzerland, and much of Scandinavia. US and Brazil cases are rising sharply. Based on Europe’s recent experience, it is easy to foresee US daily cases soon rising towards 150,000 (from the recent 50K level).

To be sure, part of the explanation for the rising cases reflects the successful ramping up of testing capabilities. The UK and USA have been criticised rightly for their early lack of preparation. Fortunately, testing has risen more than 5-fold, and both countries now rank amongst the world’s largest testers (Chart above). However, there is a difference between capabilities and strategic implemention. The UK has a strategy, but has not effectively deployed its enhance testing capability. However, the United States has not yet outlined a nationwide strategy to fully exploit the impressive mobilisation of its national resources.

The Charts also show that infections are now very low throughout Asia, as well as Australia and New Zealand. Singapore has an impressive testing program.

However, the second wave has been characterised by a worrisome rise in positivity rates — the share of tests with positive results (Chart above). Indeed, this summer the rate was only 1% in Spain, France, and UK. Even in Germany, the share of positive results has tripled in recent weeks. Much of Europe and USA are now above the WHO’s 5% threshold level. In several US states, the positivity rate exceeds 20%.

Fortunately, we do seem to have learned lessons from the first wave. Hopefully, the health and economic consequences will be less severe than earlier, and a generalised lockdown can be avoided. For instance, the Chart above indicates that so far fatalities during the second stage are greatly reduced. Seemingly, more vulnerable people have remained cautious, despite the easing of restrictions during the summer. Likewise, pressures on hospitals so far have not been as intense as last Spring (next Chart).

To be sure, hospitalisations are rising sharply in Europe — a trend that will surely continue this winter. Likewise, the following Chart illustrates that US hospital visits for all age groups were much lower during their second wave, and have fallen further since the summer. But, US hospital admissions are now rising again. Sadly, we know that hopitalisation will lead inevitably to higher death rates this winter.

Maintaining compliance with mitigation restrictions is becoming increasingly challenging. During the first wave, to a degree, there was a sense of solidarity: we are all in this together. Faced with the rising economic and social costs of lockdowns, governments are attempting increasingly to target their interventions along geographic lines. This is understandable. In the UK, for example, the infection rate in Liverpool is 20 times higher than in lovely Cornwall. Infections in Paris and Madrid regions are more than twice the national average. The positivity rate in previously-devasted New York is now 1% compared to 46% in Nevada! Whether precision-targeting of mitigation is effective remains to be seen. However, maintaining a sense of national unity of purpose may become more problematic.

Emerging Markets: Experience Explains Alot

The two Charts illustrate the sharply differing Covid experience within the Emerging Market nations. Clearly, Asia’s previous experience will pandemics has helped keep the number of infections and deaths at low levels. At the other extreme, Latin America has suffered greatly during the health emergency (adding the United States to the chart amplifies how the USA has struggled). Emerging Europe falls in the middle of these two extremes. Poland and Hungary are not much worse than Germany. Czech and Romania have fared considerably worse, as has South Africa. (I will deal with the Covid-related economic impact within the Emerging universe in upcoming blogs).

Strategic Considerations

  • I am hopeful that the health and economic consequences of the second wave will not be as severe as the during the initial outbreak, and a renewed generalised lockdown and double-dip recession can be avoided. Nevertheless, I believe that the output lost during the recession will not be recouped until mid-2022.
  • As with health issues, “long Covid” may depress economic activity for several years, as economies confront weak productivity, reluctant labour force participation, high levels of debt, and constrained business investment.
  • The United States has suffered greatly during the pandemic, as a result of inadequate preparation, delayed and inconsistent responses, poor public messaging, etc. On the positive side, the nation’s vast resources are now being mobilised: an impressive fiscal stimulus (more needed) and testing expansion. What remains missing is a clear, consistent nationwide strategy to make use of these resources.
  • Nevertheless, the US economy has outperformed Europe so far this year, reflecting its larger fiscal stimulus. I would not be surprised if that situation changes during the next 12-18 months.
  • The fallout from the pandemic is one of a number of headwinds confronting the US dollar in the coming year.
  • Despite the weaker USD, I have remained comfortable with an underweight recommendation for Emerging Markets. I have a strong preference for Asia over Latin America.
  • Stay safe and healthy. I share your lockdown fatigue! But, if we all pull together, I am confident the world will look very different a year from now!