Coronavirus: Science & Economics
The 2019 Novel Coronavirus, recently named COVID-19 by the World Health Organization, continues to garner headlines and investors’ attention. The human toll continues to rise, and markets fluctuate with the ebb and flow of its successful (or unsuccessful) containment. We look to cut through the noise and assess the epidemic in terms of its science and economic impact.
Coronaviruses encompass a large number of viruses in humans and animals. It is an RNA virus and named for its crown-like spikes on its surface. We have seen coronavirus outbreaks before—the severe acute respiratory syndrome (SARS) in 2002 to 2003 and Middle East respiratory syndrome (MERS) in 2012. As a family, coronaviruses are the cause of 5% to 10% of community-acquired respiratory infections in adults.
COVID-19 appears to spread more easily than SARS and MERS, but the mortality rates are lower than the typical flu (likely less than 2%, although it is difficult to estimate due to unreported cases). Currently, the number of globally confirmed cases stands at more than 40,000 and continues to rise; there have been over 1,000 deaths in China so far. It is expected that warmer summer weather will curb the spread, but we also expect a resurgence next winter. More concerning is that there is evidence indicating epidemics such as COVID-19 could become more common over time.
The Coalition for Epidemic Preparedness Innovations (CEPI) has opened a call for proposals to develop a vaccine against the virus. At least four companies have started programs. CEPI’s goal is to bring a candidate to clinical testing in 16 weeks—an extremely aggressive timeline. While we have the sequence of the virus, developing a clinical candidate, getting US Food and Drug Administration (FDA) approval to run trials, recruiting the trial, running the trial, analyzing the data and producing mass amounts of vaccine will take far longer than 16 weeks. It is unlikely a vaccine to be available before 2021. Further, there is no guarantee that any vaccine developed now will be effective in subsequent outbreaks since the virus could mutate.
Prior to the emergence of the coronavirus in central China, the global economy was poised to enjoy a relatively benign 2020 as uncertainty about trade policy ebbed with the passage of the US-Mexico-Canada Agreement and the phase one US-China trade deal. US employment gains remained impressive, European growth was rebounding, and asset prices were buoyed by abundant liquidity. Events, however, intruded. Until the scale and scope of the coronavirus infection are more certain, there remains insufficient information to project the medium-term impact on the global economy. Even if it remains mostly contained in China, the second-largest economy in the world, the associated disruption in activity would be material. This is not our base case, as Chinese leadership responded forcefully to lock down the affected areas to limit the spread of the infection. They also appear willing to use policy stimulus to offset some of the toll on the economy. There will be a toll, however, as real economic growth slows sharply in the current quarter from the temporary shuttering of businesses before rebounding in the next. Needless to say, this outlook is fluid and the distribution of risks is decidedly skewed to the negative.
Also recognize that the outbreak will pollute Chinese and regional economic data for at least the first quarter, and policymakers will likely find themselves operating at an information deficit. The issue could be particularly pronounced in Japan, as the economy is highly open to trade, and its economy is still digesting the lagged impact of last fall’s consumption tax hike. While we do not think this will prompt additional easing from the Bank of Japan, it will likely increase their sensitivity to any perceived signs of softening in activity or inflation.
In Europe, the outlook has improved marginally, but it remains exceptionally fragile. Aided by generous European Central Bank (ECB) liquidity and a marginally supportive fiscal impulse, an improving global backdrop and fading idiosyncratic headwinds, the German export sector should be an important contributor to European growth in 2020. However, the primary characteristic of the “improving global backdrop” was stronger Chinese demand for German manufacturing. Unfortunately, as the coronavirus has called Chinese growth into question, so too has it threatened the outlook for the European Union.
For the US, China remains an important trading partner, but economic activity is more domestically focused and concentrated in services. In line with the thinking at the Federal Reserve (Fed), the risks to the US economy are skewed to the downside. In our base case, the Fed keeps policy the level of its policy accommodation unchanged this year. Economic growth slowed sequentially in 2018 and 2019, and we see a similar-sized downshift in the pace of activity in 2020. Such a slowing should limit the buildup of pressure on resources that are already stretched given the low unemployment rate and help to sustain economic expansion.
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