I have been studying up on what epidemiologists are saying about the coronavirus. And, right now, there seem to be two divergent outcomes for how the Covid-19 outbreak develops. And there also seem to be two potential approaches to dealing with the virus. I want to run through these outcomes and approaches to make some general comments about what it could mean for the economy and financial markets. Since I am not an epidemiologist, I can’t speak to the science of this. But I can report on what credible scientists and health officials are saying and what I think it could mean economically. So, that’s what I will attempt here.
The scenario where Covid-19 virus infections peter out
The latest news on how the coronavirus infection rate is declining in China is somewhat encouraging. According to The Guardian, the World Health Organization says that there are now more new cases outside of China every day than inside. That’s because, on the one hand, the infection rate is declining within China and it is accelerating outside China.
If you look at this from a glass half-full perspective, it says that the firewalls China has built are working, since the latest numbers show 60 times more cases of coronavirus infections in China at 78,073 than the infection total in the country with next highest number of infections, South Korea, with 1261. So, to the degree that the infection rate is slowing in China and it is relatively low outside China, the optimistic outcome would be one where the number of new cases overall falls toward zero from here, such that by April or May, the outbreak has been largely contained.
The problem with this interpretation is what Swiss health authorities said a couple of weeks ago:
At present, it is tempting to estimate the case fatality rate by dividing the number of known deaths by the number of confirmed cases. The resulting number, however, does not represent the true case fatality rate and might be off by orders of magnitude. Diagnosis of viral infection will precede recovery or death by days to weeks and the number of deaths should therefore be compared to the past case counts – accounting for this delay increasing the estimate of the case fatality rate. On the other hand, cases in official statistics are likely a severe underestimate of the total – accounting for this underestimate will decrease the case fatality rate. The time between diagnosis and death/recovery and the degree of underreporting will vary over time as well as between cities and countries. A precise estimate of the case fatality rate is therefore impossible at present.
So, the real answer here is that we just don’t know how this is tracking.We don’t know the infection rates, nor do we know the fatality and recovery rates. We can be optimistic. But it’s better to prepare for worst case scenarios than best case ones.
The best strategy to employ if a pandemic can be averted
Having said all of that, the question then goes to what strategy health officials should employ. Optimistically speaking, Covid-19 virus infection rates may drop, but yesterday, the Washington Post reported that “a Chinese health official warned that at least 28 days without new cases are needed to be able to say an area is free of the outbreak.” So, we won’t know for at least another month whether this optimistic take is true. And if it’s not, employing the wrong strategy could have horrific consequences.
Yesterday, I wrote that the Chinese lockdown and quarantine approach is:
“how we want public health officials to act. It’s important to say this because the draconian measures the Chinese are taking are designed to save lives. And by not taking those actions, they would risk the outbreak being more severe and potentially much more deadly. So I would describe this less as ‘fear’ of coronavirus hitting economies and more as ‘justifiable caution’ hitting economies. In my view, fear is what we would see if authorities didn’t do anything and the virus spiralled out of control as a result. People would really be afraid then – and the economic consequences would be even more severe.”
But, let’s unpack that for a second because there are some implicit assumptions there.
So far, the Chinese approach is to assume they can shut this virus down – that they can prevent its spread by taking a lockdown and quarantine approach. Along those lines, Canadian Epidemiologist Bruce Aylward, team Lead for the WHO-China joint mission on COVID-19, said in Geneva, Switzerland yesterday that “the aggressive response China took… had huge effects in suppressing the spread of the disease, estimating that those measures prevented hundreds of thousands of people in China from being infected.” And by saying this, Aylward is telling us the Chinese are taking the right approach – even if it is disruptive economically.
That’s what I was saying yesterday as well.
The pandemic approach
But what if we can’t stop the spread of this Covid-19 virus? What if a pandemic is inevitable – what then?
Look at what James Hamblin is saying at the Atlantic, for example:
The world has responded with unprecedented speed and mobilization of resources. The new virus was identified extremely quickly. Its genome was sequenced by Chinese scientists and shared around the world within weeks. The global scientific community has shared genomic and clinical data at unprecedented rates. Work on a vaccine is well under way. The Chinese government enacted dramatic containment measures, and the World Health Organization declared an emergency of international concern. All of this happened in a fraction of the time it took to even identify H5N1 in 1997. And yet the outbreak continues to spread.
The Harvard epidemiology professor Marc Lipsitch is exacting in his diction, even for an epidemiologist. Twice in our conversation he started to say something, then paused and said, “Actually, let me start again.” So it’s striking when one of the points he wanted to get exactly right was this: “I think the likely outcome is that it will ultimately not be containable.”
Containment is the first step in responding to any outbreak. In the case of COVID-19, the possibility (however implausible) of preventing a pandemic seemed to play out in a matter of days. Starting in January, China began cordoning off progressively larger areas, radiating outward from the city of Wuhan and eventually encapsulating some 100 million people. People were barred from leaving home, and lectured by drones if they were caught outside. Nonetheless, the virus has now been found in 24 countries.
Despite the apparent ineffectiveness of such measures—relative to their inordinate social and economic cost, at least—the crackdown continues to escalate. Under political pressure to “stop” the virus, last Thursday the Chinese government announced that officials in Hubei province would be going door-to-door, testing people for fevers and looking for signs of illness, then sending all potential cases to quarantine camps. But even with the ideal containment, the virus’s spread may have been inevitable. Testing people who are already extremely sick is an imperfect strategy if people can spread the virus without even feeling bad enough to stay home from work.
Lipsitch predicts that within the coming year, some 40 to 70 percent of people around the world will be infected with the virus that causes COVID-19. But, he clarifies emphatically, this does not mean that all will have severe illnesses. “It’s likely that many will have mild disease, or may be asymptomatic,” he said. As with influenza, which is often life-threatening to people with chronic health conditions and of older age, most cases pass without medical care. (Overall, about 14 percent of people with influenza have no symptoms.)
Lipsitch is far from alone in his belief that this virus will continue to spread widely…
I suggest you read the whole piece because there is a lot more to digest there. But, the obvious implication here is that the lockdown and quarantine approach won’t work. The Lipsitch view suggests that Covid-19 will become ubiquitous; lockdowns and quarantines won’t work. And if they won’t work, then their cost will be for naught.
My view
I think we are near a crossroads here. The lockdown and quarantine approach is having a major impact on economies by shutting down supply and reducing demand. No manner of monetary intervention is going to counteract that. If left in place long enough, this approach will cause the world economy to buckle and break. At the same time, health officials would be hard-pressed not to take this approach, knowing that by not doing so, at least initially, they will be rightfully accused of putting many lives at risk. And if they allowed the virus to spread and infection rates soared, the fear this would cause would have even more dire economic and social consequences.
Nevertheless, infection rates in China are receding. And so, the Chinese have already started to lessen the restrictions in place. They are slowly trying to bring back a sense of normalcy to their economy, hoping that their efforts so far mean the worst is over for them.
Outside of China, though, the infection rates are mushrooming. And we have the potential for a pandemic on our hands. Health officials outside China are now employing the same lockdown and quarantine approach the Chinese did. Recently, I heard that there are even questions whether the 2020 Tokyo Olympics might be cancelled due to the outbreak. So, you get a sense of how disruptive this virus is becoming.
The crossroads, then, is manifold. We are soon to learn whether the infection rate in China declines, whether the rise in infection rates outside China eventually rival those within China, and whether all of this forces a lockdown and quarantine approach that takes the global economy down. I still believe that we know so little about the lethality and transmission of this virus that the draconian response is still warranted. But, at some point, we will move to a different approach. Whether that’s before or after a pandemic can become entrenched remains to be seen.
And, in terms of this newsletter, the more narrow question is what that means for the economy and financial markets. It’s impossible to put numbers to this. But what we can say is that policy makers will face a test: do they relax Corona-virus restrictions before it is clear that a pandemic has been averted or do they risk a global recession in order to break the spread of this disease? It’s a hard choice because the outcomes in either case are so uncertain. This is where we are right now. And, to me, it means we should expect volatility as people move between fear and relief more than anything else.
Right now, we are flying blind.