By Ross Maund and Dave Wilkin
The COVID-19 pandemic, part one of three: update and economic scenarios
Our Big Challenges series will be delayed to provide additional perspectives on the COVID-19 pandemic as this battle continues. It is unknowable when the pandemic’s new case downward trend will allow for a measured and then a full opening of economies. The consequential social and economic impacts and costs from simultaneously locking down the world’s economies should be understood by all. Given the unprecedented nature of this pandemic, some countries will reopen their economies successfully, many may not. Given the serious consequences of fumbling the economy, it is so important that various authorities get it mostly right.
Responses to a pandemic can be compared to coordinating the logistics associated with war, requiring both tactical and strategic execution. This means not only defeating the virus but also dealing with all the issues around the periphery of the immediate medical and related responses. This enemy is deadly and moves in a stealth manner with great speed. A permanent victory in the end likely requires a highly effective vaccine ‘weapon’. Until that becomes available and widely deployed, the current ‘social distancing’ (and testing) being deployed has shut down the majority of country economies and could over time inflict collateral damage exceeding that of the virus itself. Given the already weakened state of the global economy, if the delicate balance between easing restrictions and continuing lockdown is not achieved, chaotic economic and social consequences are likely. Additionally, effective and properly targeted government support and stimulus initiatives are critical to both reduce immediate economic suffering and to help ensure economies can be revived.
Within the current volatility, Canadian and U.S. cases are still rising but at a slowing rate. Continuing efforts to contain the virus spread and protecting those most vulnerable, especially seniors and people with underlying health conditions, remains high priority. Encouragingly, the efforts seem to be producing positive outcomes. A quick snapshot of important Canadian and U.S. metrics as of April 26:
Ninety-two per cent of Canadian deaths have been in Quebec and Ontario. A very difficult situation for Quebec, where cases and deaths are 3.6 and five times respectively the rest of Canada’s average per capita rate. Canadian epidemiology reports reveal some significant characteristics, including that 74 per cent of all hospitalization cases had underlying health conditions and 94 per cent of all COVID hospital deaths were people aged 60-plus. The worst case Canadian modelling death estimates are not materializing.
In the U.S., New York City along with its neighbouring states’ hot-zones account for about 63 per cent of all U.S. virus deaths. NYC’s mortality rate per capita is almost 20 times the rest of the U.S. average outside of this extreme hot-zone. Exclude this one hot-zone area and the U.S. deaths per capita drops down close to the Canadian average rate. A recent NYC-area health system study showed a staggering 94 per cent of all COVID-19 patients hospitalized had underlying health conditions. The tragedy of NYC and area does not appear to be replicating across the U.S. as many had feared, and worst-case U.S. model estimates of COVID-19 hospitalization and death rates are not materializing. This too is encouraging.
On the watchlist projections of COVID-19 impact on economies are of concern. Many notable economists and the International Monetary Fund (IMF) are warning that there will be grave consequences. The U.S. Q1 may see a decline in gross domestic product (GDP) of up to five per cent, with a Q2 declining a staggering 20 per cent to 30 per cent. Many countries in the EU and Asia will have similar or worse economic outcomes. Canada is likely to parallel the U.S. GDP ranges. There appears to be four relevant economic scenarios, largely dependent on the duration of G20 national economies’ closures:
1. Shallower V-shaped recession
Economies gradually begin reopening first in countries and regions least/first impacted. As new cases steadily decline, most economies are largely open by the summer. Stock markets are likely to retest recent lows, but generally demonstrate relative stability, with Q3/Q4 economic results rebounding. 2020 GDP declines remain under five per cent, followed by a return to solid growth in 2021. The total global debt market is inflated approximately 20 per cent of GDP, but markets and debt expansion marches on.
2. Deeper U-shaped recession
Most economies stay largely closed well into the summer, with fuller business openings not occurring until later in the year, causing little to no growth in the second half of 2020. GDP declines are in the range of 5-10 per cent. 2021 economic growth remains weak, with the highest indebted countries having the worse growth outcomes. Stronger recovery is delayed into 2022. Volatility remains high with significant stock market declines reaching new lows, eventually bottoming in 2021. The total global debt markets inflate by 20-30 per cent, then debt expansion continues.
3. W-shaped ‘bubble collapse’ recession
Economies only partially open by mid-summer, and not fully opening until 2021, causing GDP declines exceeding 10 per cent. The total global debt bubble likely inflates by more than 30 per cent of GDP before major economic deleveraging occurs, despite governmental quantitative easing and increased economic intervention. Total global debt and other asset bubbles deflate as a deeper recession takes hold. Accelerating new stock market lows return with total declines likely exceeding 50 per cent, leading to a weak recovery lasting multi years into the future. Government long-term economic restructuring programs are required, with actions to remedy past economic excesses, high debt loads and expanded social issues all slowing economic recovery.
Overall government actions are too little and/or too late, meaning an inability to balance longer-term economic consequences against COVID-19 mitigation actions. Essentially a chaotic collapse in debt hastens an economic depression. Depressions typically include: significant rise of unemployment, credit markets closed, longer term GDP declines, accelerated bankruptcies, long term bear market conditions, deflation and sovereign debt defaults.
All of these scenarios are tied to government actions and the longer it takes to open economies successfully, the worse the scenario that plays out.
Here is a helpful layman’s video (2013) on economic and debt cycles worth watching from Ray Dalio, one of very few who predicted the 2008 crash (he founded Bridgewater Associates, the world’s largest hedge fund manager). This article from author Harry Dent, Harvard MBA and researcher who predicted the stock market run-up in the 1990s and 2000s and the 2008 crash, also warns of unsustainable market bubbles. Both are equity market contrarians and have seemingly different views on how the current long-wave debt cycle ends. Dent suggests serious deflation, Dalio more serious inflation.
In part two to come we will shed some light on key factors shaping what is playing out and how the world is fundamentally shifting.
Dave Wilkin, P. Eng., Ross Maund, career senior executive. Both are Huntsville residents.
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