Extraordinary Times, Extraordinary Measures

Since the pandemic struck, we at Invesco have participated in conversations with epidemiologists, virologists, medical and macro policymakers, to inform our three-pronged analytical approach to the pandemic period – public health, monetary and fiscal policies – and potential structural changes to assess the long run outlook. Here we summarize key points from our COVID-19 conversations on Asia, Europe, the United States and EM.

Five conclusions from COVID-19 conversations linking epidemiology and our economic analysis:

1. Scientific understanding and the containment of COVID-19 seems to have progressed enough for lockdown relaxation despite clear and present risks and incomplete information for seven key reasons. 

- Epidemiological data: Progress in containing COVID-19 is reflected in sustained flattening infection and mortality curves. In addition, “hit ratios” (positive to total tests) have been fairly stable in most developed market (DM) economies, even as testing has been ramped up;

- Emerging Markets: New epicenters, like India, Brazil, Russia, should see curve flattening as well, though premature relaxation due to severe economic pressures in some countries may retard curve flattening;

- Health capacity: Improvements in the capacity and quality of testing, hospitalisation and treatment should reduce the impact of second waves or risk of overloads, probably more in DMs than EMs;

- Epidemic to endemic: Instead of being largely eliminated like polio, COVID-19 may persist like the flu;

- Social and mental vs. physical health: Lockdowns themselves may undercut societal welfare, through mental health, living and socio-economic conditions, and “excess deaths” above average rates;

- Health vs. wealth and income: Stringent lockdowns threaten significant long-term economic and financial damage to many firms, most households, entire economies and indeed the whole world;

- Real-world decision making: Few policies are based on perfect information, including “pure” economic decisions – as well as those involving trade-offs between growth and other measures of welfare.

2. Epidemiological “scenario uncertainty” persists. Different models argue for different policies: Those predicated on rapid spread and potentially high fatalities, called for very strict lockdowns initially and for partial lockdowns in case of second waves. Competing models, based on earlier start dates, wider spread and lower fatality rates, suggest isolating vulnerable groups while allowing for general normalization.

3. We expect diversity in epidemiological and economic experiences of release: Lockdown stringency has diverged across countries. In turn, highly differentiated curve flattening is probably due to varied enforcement/compliance, socio-economic, cultural and demographic features; and perhaps geographic differences in exposure to other coronaviruses and associated resistance. Such differences point to variations in lockdown relaxation, in public response and behavior, and in the risk of secondary waves.

4. By extension, we should expect unsynchronized recoveries, in the shape of a “square-root”, in contrast to a largely synchronized “Great Compression” as major economies locked down in quick succession. The widely shared public health policy of lockdowns caused a rapid, deliberate compression in economic activity starting in Q1 into Q2. But release won’t be like flipping a switch back “on” — it will be gradual, uneven, taking time to gain traction, all the more so if there are differentiated second waves. We expect continued differentiated performance across economies and asset classes during the recovery.

5. Major changes are likely in national and global health, macroeconomic and industrial policies, affecting investment, consumption and potential growth after the coronavirus is conquered. We will follow up with notes on geo-economic/geopolitical and macro policies, performance and prospects. 

Read more about these conclusions in our Whitepaper ‘Pandemic Progression and Prospects: Facts, Figures and Possibilities’.