Double dip is now the base case for the global economy

By Edward Harrison On Oct 31, 2020

Quick weekend post because of the news flow

I am moving to double dip as my base case for the global economy because of the lockdowns rippling across Western Europe. I have seen confirmed or likely lockdowns in France, Germany, Spain, Wales, the UK, Belgium, the Netherlands, and Austria now. The economic impact will be large enough and the collection of countries is large enough to believe it means a global double dip, not just a European one. Given the data out of the US and the fact that we have not yet seen lockdowns, I am holding my fire on the US. But I think the double dip is likely here as well.

Policy responses

The last three articles I linked to on Twitter highlight where this is going. (See here for the UK, here for Switzerland and here for Austria). Mohamed El-Erian’s logic comes to mind here: “Governments feel obliged to act despite the political cost of doing so.”

The role of the state in Europe is more protective than it is in the US where rugged individualism is still revered. And so that means that the viral situation has advanced so far that governments across Europe will feel forced to act.

Austria’s lockdown is emblematic of how this is proceeding. So let me translate a quote from Austrian daily “Der Standard”:

The cuts that are coming seem massive. According to the latest draft ordinances for new coronavirus measures, we will be faced with a nighttime curfew and restaurants will also close.

What all of this means for schools and kindergartens now depends on the Ministry of Education. It is true that these are explicitly excluded from the new rules in the regulation…

However Education Minister Heinz Faßmann has the option of regulating these separately by ordinance. This is what he did, for example, when he ruled that there should be a switch to distance learning nationwide in March…

In the latest draft, we are getting:

A strict curfew from 8PM to 6AM
Swimming pools and other leisure locations are off limits. That also includes dance schools, cinemas, and betting shops. Museums and Zoos will close but parks and libraries will remain open
All gatherings must be canceled including garden or garage-parties
This will go into effect on Tuesday through to the end of November

What Germany and Austria are doing is the minimum we will see when shutdowns are implemented. They are calling this a light lockdown, just as the Germans are calling theirs a light lockdown. But, while it’s not a complete shutdown, it’s a pretty severe curtailment of activity. And that’s going to cause GDP to contract. Kurzarbeit rules will go into effect to prevent massive job losses.

Remember, this is now going to happen across Europe.

Health system overload

An account from the Swiss paper “Neuer Zürcher Zeitung” was illuminating in terms of what health system overload looks like. And the biggest takeaway for me was that the thing in shortest supply in these instances is people.

The health care system overload happens when healthcare personnel are tapped out and overloaded. When the number of people who are infected and in need of medical attention is more than the medical professionals can handle, that’s when the system breaks down, chaos happens and things move toward a total shutdown.

Here’s a translation of the important bits of their account:

We’ve seen this picture before — in March, shortly before the peak of the first corona wave: Health Director Natalie Rickli surrounded by her staff, hospital directors to the right and the left. This Friday it was that time again, and the message that the authorities sent to the media with this large contingent was unmistakable. The situation is serious. The hospitals still have the situation under control, but it is imperative that the number of infections be reduced. Otherwise it will be tight.

The canton of Zurich reported 1278 positive Covid-19 tests on Thursday. The numbers in Zurich are now seven times as high as in the first wave. What is far more worrying is that the number of those hospitalized is also skyrocketing. On Thursday, 221 Covid-19 patients were in hospital. 21 people had to use ventilators. In terms of hospitalizations, the peak value of the first wave has already been exceeded.

Since the number of hospitalizations lags behind those of infections, it can be assumed that these will continue to rise steeply, said Jörg Gruber, head of the supply planning department at the health department. Gruber calculated that at the current pace, the hospitals would have to treat 400 Covid 19 patients in one week, and in two weeks it would be 800.

These are the abstract numbers. What they mean — what it means when a hospital is “under a heavy burden” – is something Caroline Milano, 54, and Martina Giallella, 33, experienced firsthand. The two nurses from Zurich traveled to Ticino for two weeks on March 27, 2020, to the La Carita hospital in Locarno, to help. Milano and Giallella arrived at the height of the crisis. They were the only nurses there from German-speaking Switzerland.

Martina Giallella: “Back then, I left Zurich with a queasy feeling – like going to the front. As a specialist, you have a sense of how it could be. But when I got to Locarno, everything was so much worse. It was a shock to see so many patients, all turned on their stomachs, all ventilated and struggling to survive. And all of the staff was in full protective gear. It was surreal. If you haven’t seen it yourself, then you can’t imagine it. ”

Caroline Milano: “On the first day and the days after, I literally worked 13 hours without a break. I didn’t know where the toilet was until the evening of the first day. I didn’t eat anything and only drank a sip of water from the tap every now and then. The work was physically demanding because you had to turn the patients so that they could lie there for hours. There are specific staff for this, but you have to help with all the hoses and monitors that have to remain connected.”

If Zurich hospitals reach their limit at some point, it will not because they have too few beds or ventilators. The bottleneck is the staff…

It is undisputed that the staff is the limiting factor, said Gregor Zünd, CEO of Zurich University Hospital, on Friday. If the staff reach their limit and more are absent, the quality of treatment will suffer…

My take

If you read between the lines, they’re telling you overload is likely coming. They are hoping they can avoid it in Zurich. But, even there, they are already at hospitalization levels exceeding the peaks in the Spring. Maybe their staff planning will help them overcome this wave. But, not every place seeing a spike in coronavirus cases will be able to avoid healthcare system overload. And that means full lockdowns are coming.

So I see a double dip in Europe as pretty much a foregone conclusion here. The hit will be large enough to consider it a global double dip too.

I won’t speculate on the US because the policy response and the economic impact are more uncertain. But, I do think the risks of similar localized system overloads in the US are high. Rugged individualism won’t prevent shutdowns in those cases.

P.S. – The fact that I felt compelled to write this on a Saturday tells you things are moving quickly. Expect a crescendo on this front in the US and Europe as we head into the US Thanksgiving holiday.