The Day After Tomorrow: One Bank Sketches Pandemic ‘Exit Strategy’

When will it be safe (or advisable) to restart the US economy?

Relatedly, “what is the value of human life relative to a unit of economic activity?”, as Ray Dalio put it last month.

Howard Marks posed the same question on Tuesday. “It will be very challenging to resolve the conflict between social isolation and economic recovery. How will we know whether the disease merits the cure?”

Taken together, and considered in conjunction with the deleterious psychological effects associated with forcing large swaths of the American public to remain inside their homes, these are the only questions that matter right now.

The assumption is that social distancing measures, shut-ins and lockdowns will result in a “flattening of the curve” and that the death toll will peak, then fall.

Unfortunately, doubts about the veracity of China’s data on infections and total deaths make comparisons difficult, but for now, Hubei can serve as a kind of benchmark for the likely timeframe on the resumption of civic and economic life around the world.

Deutsche Bank’s Jim Reid, Luke Templeman, Marion Labourne and Henry Allen (I’ll simply cite them all under Jim’s name below) take a look at this in a focus piece called “the exit strategy” out earlier this week.

They begin by looking at the three-day growth rate in fatalities across countries with “each time series [starting] at the point at which restrictions were introduced to attempt a closer comparison”. Here’s the visual:

(Deutsche Bank)

One quick takeaway is that the three-day growth rate of fatalities in Hubei fell faster (and more uniformly) than in other countries, even if the trajectories are broadly similar.

“That is because Hubei implemented restrictions earlier in the process of infection than did some other countries with the US being the laggard”, Reid says, on the way to noting that “the six other countries examined have a greater proportion of people in the population that classify as high risk (primarily the elderly)”.

Of course, it could also be that Beijing simply “smoothed” the data, but I’ll leave that aside given all the press the subject is already receiving this week (those interested in more can read here and here).

The high-level takeaway, Reid says, is that “while it is early days, most of the charts indicate each country’s fatality trajectory are now converging (in different stages) with that of Hubei”.

So, what does that entail for the resumption of civi and economic life?

Well, the following visual shows what Deutsche Bank describes as “a ‘football field’ representation of the range of possible timelines for the restart of activity in several countries”. The grey/blue bars are the current lockdown periods, while the light blue bar is a range based on the Hubei experience.

(Deutsche Bank)

Reid goes on to note that “in Hubei, the three-day growth rate in new cases decreased from over 200% to 63% in the 14 days after restrictions were put in place”, but it wasn’t until 63 days later that they were lifted.

Based on the above (and the full note is much more extensive), the following table projects potential dates for the tentative restart of economies and social interactions in the western world.

(Deutsche Bank)

The last column is important. As the footnote spells out, those are “assumed” to represent “a period of two generations of the COVID-19 (max 28 days) in which there are no new cases”. Reid says that in Deutsche’s judgment, the dates in column three are “unlikely for the countries in this analysis” but they are included “as a reference point”.

There are, of course, any number of caveats, and even upon the resumption of something that looks like “normality”, things may never be completely the same.

In the initial stages, Reid says travel will be “the last thing to get back to normal as countries that have made the effort to domestically remove the virus will be very reluctant to open borders without strong evidence that travelers are virus free”.

Extrapolating a bit (i.e., Deutsche doesn’t say this, but I will), COVID-19 and the generalized fear of something worse coming along, will almost surely be exploited by opportunistic politicians whose political fortunes are closely tied to the ebb and flow of nationalism and anti-immigrant sentiment.

The upshot, from Deutsche, is that “the global economy will have to deal with the consequences of countries opening up their domestic economy before their international one [and] this will test the full V-shape global recovery thesis”.

In my view, it may well be that nations never reopen themselves completely. Globalization was already on the back foot thanks to the proliferation of populism and noxious nationalism in the west. The coronavirus may have been the death knell for the post-War order. The interconnectedness of markets and supply chains will get a wholesale rethink on top of what was already underway thanks to the trade war.

And yet, Deutsche says that by June, “workers within countries will have resumed their jobs, retail stores will be open, and restaurants functioning”, even as the effects of the pandemic will linger in the form of occupancy restrictions and the persistence of what one might call “soft” social distancing guidelines.

It’s also possible that a kind of dystopian, post-COVID reality will ensue. Here’s Deutsche:

Once an individual takes a test and determine that they either have already had COVID-19, or currently do not have it, then they can be cleared to resume normal life. This proof of this could be managed through the use of smartphone-based technology (a bio-passport?) if privacy concerns can be addressed. At the same time, those who either have the virus, or who are in higher-risk groups, can continue to self-isolate.

So, social stratification and the passing of smartphone, bar code tests as a prerequisite for leading a normal life. It sounds like science fiction – but here we are.

Although Deutsche’s Reid strikes a generally hopeful tone, he reminds you that “one of the great unknowns with COVID-19 is the extent to which it will return after the 2020 summer”.

After all, he cautions, it’s often “pointed out that when the 1918 flu returned, it was more deadly than at the beginning”.

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