Although the Covid-19 virus continues to spread in Western Europe and the US, operational responses are largely in place and many companies are now adjusting to a period of lockdown. It is therefore a good time to consider the future after the virus. In this report, we will therefore lay out:
- The context around the Covid-19 virus
- The two most likely scenarios for 2020
- Triggers, indicators and warnings leading to scenario development
- Economic consequences
- Wider corporate factors of interest
- Winners and losers by industry sector
- Current virus cases versus global preparedness, per country
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- At the time of production, the Covid-19 virus has affected 171 countries and territories, with 220k cases worldwide, and a death rate of over 4% (although the reported number of cases is probably much lower than the real rate, so this proportion is almost certainly overstated).
- Despite government reactions varying, there is now broad consensus over a lockdown/restriction approach based on social distancing. This has been shown to work in a number of countries, and was a major factor in rates reducing in China, Singapore, and Hong Kong.
- However, the flattening of infection rates has been challenged by cases being brought back into these countries, as there is a very low level of public immunity – indeed, there may be no sustained immunity at all, based on other coronaviruses.
- Markets meanwhile are in turmoil, with uncertainty and major volatility set to be sustained until the (first) peak of the virus has passed in major economies, a process that seems set to take at least 6-12 weeks (and probably longer).
- Unprecedented interventions include societal controls and movement restrictions, international travel bans, border closures, reduction of interest rates to (nearly) zero, huge quantitative easing, and innovative schemes such as the UK government’s support for employment; further tax breaks and incentives are likely as both governments and central banks scramble to mitigate the anticipated longer-term impacts on the economy.
- This reflects how the economic impacts, alongside preservation of life, are more important to most governments than the brief societal effects; however, the final “way out” of the virus is reliant on the development of a vaccine (absent herd immunity being created).
- The “race to a cure” – most probably vaccination, or something reducing lethality/impact – is a major factor driving the likely future scenarios. It is possible that existing antiretrovirals will have some impacts, but public statements on this are over-exaggerated at present. Moreover, even with clinical trials being rushed, lead times are likely to be 12 months.
- Evidence so far is that more liberal Western populations are not isolating as effectively as in Asia, with younger members of society being particularly likely to ignore social distancing. This suggests that restrictions in Western countries will be forced to increase further from current levels, with this trend already evident in Australia, France, Spain and Italy. Schools and workplaces are likely to be disrupted through 2020 even if the main peaks pass quickly.
- Meanwhile the rate of infection in Africa, Latin America, and parts of South/South-East Asia is almost certainly being under-reported. This will further increase restrictions on international travel over time, implying only a steady revival even in the best-case scenarios.
In January we originally assessed three global scenarios for the virus, simply characterized as follows:
- Best case – V-shaped, with a short impact followed by a return to the previous trajectory
- Most likely case – U-shaped, with a protracted impact followed by a slower return to global growth
- Worst case – L-shaped, with a long impact into 2021 or beyond
At this point, we feel that the V-shaped option has rescinded to negligible levels of probability given the spread in the US and Europe, and penetration elsewhere (particularly in countries with poor health systems). Although included in the diagram below, we mainly therefore consider two scenarios as being likely – the U and L shaped recoveries, with these being broadly evenly split at this stage.
These probabilities were last changed on 20 March, with best case falling from 5% to 1%, and worst case increasing from 40% to 44%. This was as assessed by a panel of Sibylline analysts from our Insight Team who have been following the topic.
At present, the consensus broadly agrees with our assessment of the U-shaped recovery being most likely, with triggers including the pace of containment in Italy (ideally requiring cases to peak this month and rates of active cases there to begin falling); the country is about 4 weeks ahead of the UK, US and European neighbours, so this is a good indicator to track. A resurgence in cases in China must also be avoided, and spread in warmer regions should remain slower if this recovery is to remain on track, since this hopefully means warmer weather will help reduce impacts – something that is still far from certain. Conversely, serious new clusters, waves, or peaks in Italy way beyond those seen in China mean that we are more on track for the long, rumbling L-shape recovery profile, which could stretch as far as 2022 and see impacts lasting as far as the next decade.
- In the absence of national/international Q1 GDP growth data, there are a range of estimates for impacts to global GDP from the supply and demand shock caused by Covid-19.
- Variations are driven by differences in underlying assessment methodologies, differing assumptions on epidemiological spread and infection rates, the availability of leading indicator data such as PMI indices or container shipping volumes, the extent to which quantitative estimates can accurately model the impact of public policy responses that are not yet fully announced and the date on which forecasts were produced.
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