16 Apr 2020
You are probably reading this while working from home, perhaps also looking for a slot for an online grocery delivery or pondering when to take your permitted trip outside the house for the day.
After several weeks of lockdown in Europe, this may even be beginning to feel normal. But we all know it is not normal, and if we are still working we should consider ourselves fortunate. The economic toll from the necessary restrictions on individuals and businesses will be immense.
China’s economy is likely to have contracted by around 10% in the first quarter, and we would expect a similar GDP decline in the US and major European economies during the second quarter.
This is not an abstract, intangible cost either; it will hit households. Our modelling indicates that in most European countries, a 10% drop in GDP is likely to be associated with a rise of two percentage points in the unemployment rate, with some variation according to the generosity of wage-subsidy schemes. In the US, where employment terms are generally more flexible, the unemployment rate could reach as high as 20%.
Public health must of course be the priority, and the economic impact could be much more severe if measures are lifted too early and COVID-19 spreads further. As investors, though, we must try to understand when it may be possible to re-open the economy safely so that we can attempt to quantify the depth and breadth of the downturn.
Recent developments in Hubei province, the origin of the COVID-19 outbreak, may help us in this endeavour. The region is now returning to some level of normality, with limits on travel to and from Hubei having been relaxed and residents returning to work.
To date, this is the only template we have for assessing the likely duration and success of lockdowns in containing the coronavirus. As such, it can serve as a guide to what Europe can expect.
Hubei imposed a lockdown on 23 January and lifted it on 25 March, 63 days later (except for the city of Wuhan, where it was lifted on April 8). We do not believe this decision would have been taken lightly, so in our view it suggests that recent encouraging numbers on new incidents of COVID-19 in China are credible. So could Europe be unlocked within a similar timeframe?
We measure the virus’s dynamics by the daily change in deaths. This is a lagging indicator, but is less prone to misreporting than others such as official tallies of infections which ignore the untested.
This metric tells us that European countries are following the same virus path as Wuhan after lockdowns were put in place. In fact, new deaths in Italy and Spain peaked four and seven days earlier into the lockdown than they did in Wuhan. There are tentative signs that COVID-19 deaths in the UK may peak even earlier.
If European countries are able to maintain a similar trajectory to Wuhan, their lockdowns could also end after 63 days. That would be around mid to late May.
The US, however, appears to be on a worse course than Hubei; it would now require a much faster flattening of the curve to catch up with Hubei and Europe. The challenge in modelling the situation in the US is that lockdowns have varied state by state in both their start date and their severity. For the chart below, we have selected 16 March – when President Trump called for social distancing for 15 days – as the start of the US lockdown.
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What could change our base case of a Hubei timeline for Europe? On the one hand, the lockdown could last longer in Europe if there is a second wave of the virus in regions that ease restrictions, including in Wuhan. This might require renewed lockdowns and cut short any economic recovery. Singapore is a case in point: after a relatively light-handed antivirus strategy, the city state was forced to announce a full-blown lockdown on 7 April.
On the other hand, we could see an earlier end to lockdowns in Europe if countries continue to run slightly ahead of the Hubei timeframe. European countries have also had more time to prepare for the virus, so new medical insights and techniques may enable nimbler restrictions that could cause less economic damage. European authorities could also take the view that the Wuhan lockdown was unnecessarily stringent and long.
The situation is finely balanced, so we will continue to monitor the dynamics of the virus day by day. Determining when some semblance of economic normality will return to Europe and the US will be an important factor in deciding when corporate earnings and sentiment to risk assets could improve.