COVID-19: Briefing, 9 March 2020

President Trump on Thursday signed an $8.3-B emergency funding package to fight COVID-19

A number of outcomes is possible, decision makers should not assume the worst.

Fewer than 3 months have since China reported a new virus to the World Health Organization (WHO). The virus is known as SARS-CoV-2, causing COVID-19 disease, spread quickly in the city of Wuhan and throughout China. The country of 1.8-B people is experiencing a humanitarian challenge, with less than 100-K cases and about 3,000 deaths.

COVID-19 happened quickly beyond China’s borders.

It moved to 4 other areas that are now established across the world: East Asia, especially SKorea, with more than 7,000 cases, as well as Singapore and Japan, the Middle East, centered in Iran, with more than 5,800 cases, Europe, especially in northern Italy, with close to 5,900 cases, and the US, with about 200 cases.

Each of these places are region where millions of people travel every day for social and economic reasons, making it difficult to prevent the spread of the disease.

In addition to these places,some other countries have been affected.

Below is a look at the current progress of the disease and its economic impact.

The next phases of the outbreak are very uncertain. But, the narrative ow that is focused on pandemic, to which financial markets and policy makers have focused is possible but totally neglects the possibility of a more optimistic outcome.

There are 3 potential economic scenarios

The perspective is based on analysis of past emergencies and on industry expertise. This perspective is as of 9 March 2020, and will update regularly as the events evolve.

What is known: Epidemiologists are in general agreement on 2 characteristics of COVID-19:

  • The virus is highly transmissible. Both observed experience and emerging scientific evidence show that the virus causing COVID-19 is transmitted from person to person. The US Centers for Disease Control and Prevention (CDC) estimates that the virus’s reproduction number (the number of additional cases that likely result from an initial case) is between 1.6 and 2.4, making COVID-19 more transmissible than seasonal flu whose reproduction number is estimated at 1.2 to 1.4.
  • The virus disproportionately affects older people with underlying conditions. Epidemiologists in China looked at more than 72,000 cases and concluded that the fatality rate for patients 80 and older was 7X the average, and 3-4X the average for patients in their 70’s, and fatality rates for people under 40 to be 0.2%.

What is being learned: 3 characteristics of the virus are not fully understood, but are Key variables that will affect how the disease progresses, and the economic scenario that evolves:

  • The extent of undetected milder cases. it is known that those infected often display only mild symptoms or no symptoms at all, so it is easy for public-health systems to miss cases. But, it is not known whether official statistics are capturing 80, 50, or 20% of cases.
  • Seasonality. There is no evidence so far about the virus’s seasonality. Coronaviruses in animals are not always seasonal but have historically been so in humans for reasons that are not fully understood. In the current outbreak, regions with higher temperatures have not yet seen a broad, rapid spread of the disease.
  • Asymptomatic transmission. The evidence is mixed about whether asymptomatic people can transmit the virus, and about the length of the incubation period. If asymptomatic transfer is a major driver of the epidemic, then different public-health measures will be needed.

We are aware that strong public-health responses, like those in China outside Hubei and in Singapore, can help stem the epidemic. But it remains to be seen how these factors will play out and the direct impact they will have. The economic impact too will vary.

Economic impact: The analysts tells us that 3 broad economic scenarios may unfold: (1) a quick recovery, (2) a global slowdown, and/or (3) a pandemic-driven recession.

We believe that the prevalent pessimistic narrative, which both markets and policy makers seem to favor as they respond to the virus, does not give enough focus on the possibility of an optimistic outcome to COVID-19 evolution.

Quick recovery: In this scenario, case count continues to grow, given the virus’s high transmissibility. While this inevitably causes a strong public reaction and drop in demand, other countries are able to achieve the same rapid control seen in China, so that the peak in public concern comes relatively soon, within 1-2 wks. Given the low fatality rates in children and working-age adults, we will see levels of concern start to ebb even as the disease continues to spread. Working-age adults remain concerned about their parents and older friends, neighbors, and colleagues, and take steps to ensure their safety. Older people, especially those with underlying conditions, pull back from many activities. Most people outside the infected regions continue their normal daily lives.

The scenario assumes that younger people are affected enough to change some daily habits. For example, they wash hands more frequently, but not so much that they shift to survival mode and take steps that come at a higher cost, such as staying home from work and keeping children home from school. A complicating factor is that workers in the gig economy, such as rideshare drivers, may continue to report to work despite requests to stay home, lest they lose income. This scenario also presumes that the virus is seasonal.

Global slowdown: This scenario assumes that most countries are not able to achieve the same rapid control that China managed. In Europe and the US, transmission is localized, partly because individuals, firms, and governments take strong countermeasures. This scenario sees some spread in Africa, India, and other densely populated areas, but the transmissibility of the virus declines naturally with the northern hemisphere Spring.

This scenario sees shifts in people’s daily behaviors. This reaction lasts for 6-8 wks in towns and cities with active transmission. The resulting demand shock cuts global GDP growth for Y 2020 in half, to between 1 – 1.5% slowing the global economy, but not into recession.

In this scenario, a global slowdown would affect small and mid-size companies more acutely. Less developed economies would suffer more than advanced economies. And not all sectors are equally affected in this scenario. Service sectors, including aviation, travel, and tourism, are likely to be hardest hit. Airlines have already experienced a steep fall in traffic on their highest-profit international routes. In this scenario, airlines may miss out on the Summer peak travel season, leading to bankruptcies and consolidation across the sector. COVID-19 would be an accelerant.

In consumer goods, the steep drop in consumer demand will likely mean delayed demand. This has implications for the many consumer companies and their suppliers that operate on thin working-capital margins. But demand returns in May–June as concern about the virus diminishes. For most other sectors, the impact is a function primarily of the drop in national and global GDP, rather than a direct impact of changed behaviors. Crude Oil and Nat Gas will be adversely affected as prices stay lower than expected until Q-3.

Pandemic and Recession: This scenario is a bit like the global slowdown, except it assumes that the virus is not seasonal. Case growth continues throughout Q-2 and Q-3, potentially overwhelming healthcare systems around the world and pushing out a recovery in consumer confidence to Q-3 or beyond. This scenario results in a recession, with global growth in Y 2020 falling to between 1.5 – 0.5%.

The coronavirus story is 1 with an unclear ending now. What is clear is that that companies have an imperative to act immediately to protect their employees, address business challenges and risks, and help to mitigate the outbreak in whatever ways they can.

Stay tuned…

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