“Every question about when the country reopens is actually a question of when testing will be good enough to allow it to reopen. Every question about the virus itself — how lethal it is, how many people have it without knowing they have it — can only be answered by more testing.”- Michael Lewis
The brutality of COVID-19 pandemic and its impact on the global economy have come into clear focus this week. The world is seeking the single answer of when it will end. While everyone is seeking for the silver liner in this dark period, we will mainly focus on the two factors which in our view may impact on the scale and the speed of the recovery the most:
- The response of the health system going forward, and
- The sufficiency of the government response in aiding the economy
Social distancing prevents the spread of the virus and hurts the growth of the economy.It is fair to say the flattening in curve of confirmed cases of COVID-19 is at the expense of shutting the economy down. The initial European hot spots appear to have slowed down which provides the US precedent on the control effect through strict social distancing.
Number of Daily Confirmed Cases (5-days moving average)
Source: Johns Hopkins University Center for Systems Science and Engineering (CSSE), as of 20 April 2020
As we have discussed in our earlier article, the first wave of impact on the economy is the shutting down of businesses due to the lock down orders in place among various countries including the US. What the going forward forecast of the economy will be will depend highly on how soon businesses can resume as usual which will impact on the potential second wave of impact on how to avoid the “good” businesses being dragged down by “bad” businesses.
When the business will resume to normal will be highly dependent on how quickly the health care system could cope with COVID 19 effectively. Although we do not agree economic risks outweigh the health risks, when will the economy unlock is indeed a healthcare question.
The development of the pandemic is unprecedented, but the nature of the pandemic is finite. While we are seeking for answers from the government for when businesses and schools will be re-opened, we all expect that given the development of the vaccine and the amount of exposure, the impact of the virus will be limited.
We need to understand that the need for reopening businesses is strong. The basic infrastructure that is just required in the daily life will need to resume back as usual to serve the economy, including medical treatments, food supply, transportation and travel etc. With such fundamental need in each government’s agenda, the ability to reopen the business will highly correlate to the development of vaccines and the ability to quarantine the affected from the unaffected.
The sharp rise of weekly jobless claims has put 22 million people out of a job in the recent one month. That is around 90% of the total job created post financial crisis from 2009 and it means the unemployment rate has reached 17% with market forecast of 20-25% area.
U.S. Weekly Initial Jobless Claims (’000), seasonally adjusted
Source:U.S. Department of Labor
However, we don’t see market reacting as bad as before and on the contrary, the markets seem to behave completely the opposite with more unfortunate macro statistics rolling out.
Why? It is because the assumption and the expectation that we mentioned above. Vaccine development is on the way and testing is generally more available to the public so affected people could be quarantined and tracked before more damage is done. Although the trend of the US hitting the peak of the confirmed cases is not obvious, the market seems to have more confidence that the end day is coming soon.
How soon will everything return to pre- pandemic?
The business survey conducted by PwC among the CFOs in the US may provide good indication on the confidence level from businesses. In our last article, we did assume around 50% of the people may be able to return to normal after the COVID-19 saga. In the survey, around 61% of the businesses expect themselves to be back as usual.
We have to acknowledge the reality here: not all activities will be normal again. There are businesses not being able to generate any output temporarily and there will be businesses that will need to forego restructuring because the capital is not sustainable to undergo the original business plan. The reality that businesses are facing will be the reality in the labor market. There will be three categories of people while returning back to the labor market:
- Those who return back to their original jobs,
- Those who look for new jobs, and
- Those who drop out from the job market permanently.
How these three types of workers compose to the current sharp rise of unemployment rate will depend on, other than the healthcare, the sufficiency of Fed’s response to the current economy.
The scale and the speed of the Fed’s response to support the real economy in the COVID-19 pandemic is impressive. The CARES plan will deliver $2 trillion in Federal spending within 6 months. In less than 5 weeks, the Fed has increased its lending to over $2 trillion including direct lending to consumers and SMEs. Fed’s balance sheet has grown $4 trillion larger and growing if in need. Unlike any recession before, these actions have been taken pre-emptively with anticipation of any severe crisis.
We do see high possibilities that US may gradually reopen its economy in the next 3-4 weeks and by then, we will have a better view on how companies and consumers may behave. It is also by then, we could see better value in good quality assets and to further realize the value of cash in the portfolio.
As we said before, the impact of the virus is finite but how humanity deals with the outbreak brings in uncertainty. The companies, individuals and institutions may take self-protective actions that may have compounding weight on the recovery of the economy, but the recovery will come eventually.
U.S. GDP and IMF Forecast (2000-2021)
Source:U.S. Bureau of Economic Analysis, International Monetary Fund Estimates