By Tom Wickers, Hottinger Investment Management
The UK economy is open for business. Non-essential shops, restaurants and pubs have tentatively wiped down their counters and unlocked their doors as the British public reacquaints itself with liberties we all took for granted just six months ago. Last week, the UK officially started its travel corridors with over 70 countries and Oliver Dowden, the culture secretary, announced that leisure and entertainment will be making a comeback in the form of swimming pools, theatres, and music venues. Freedom tastes so sweet, or does it? The natural flipside of the coin which is plaguing the minds of analysts and households alike is the potential for a second wave of the virus. After coming so far, now would seem a fitting time to assess whether we have come far enough to recover from this pandemic.
Figure 1: Daily confirmed COVID-19 cases as of 13th July 2020. Source: ourworldindata.org[i].
So, can we avoid a second wave? The simple answer appears to be yes, as some Asian countries have managed to do so emphatically. However, there are a number of niggly caveats to this assertion that will likely mean some countries do have second waves. The ability to limit COVID-19 spread will be determined by the extent to which countries want to open their economies, the protocols in place and whether the public heeds safety advice. As such, it may be that some western countries have already opened up their economies too far without the proper advice in place. The United States is the elephant in the room, but UK government policy is another example. A requirement to wear protective masks when shopping has only just been announced by the UK government, yet for some time there has been evidence to suggest that it could be a crucial factor in determining whether economies experience a second wave[i]. COVID-19 could be airborne, according to studies, meaning that transmission can occur through breathing as well as the larger droplets from sneezing and coughing that are commonly associated with flu. The implication is that the virus transmission rate may not be controllable if indoor activities are permitted without suitable protection.
Additionally, super-spreader events have led to many of the outbreaks we have seen in eastern and western economies alike and have been estimated by some to cause up to 80% of secondary transmissions[iii]. A super-spreader choir practice held near Seattle in March was studied and it was found that 53% of the room became infected within 2.5 hours[iv]. Identification and prevention of these events will be crucial in limiting the number of outbreaks, meaning some aspects of life will not return to normal in most economies until a vaccine is found.
It is no secret that some countries have contained the virus more successfully than others. According to one of the most prominent Chinese COVID-19 scientific advisors, Zhang Wenhong, the outbreak “has already ended” for China[v]. A crucial explanatory factor for the disparity in the effectiveness of lockdowns is unsurprisingly held in the efficiency of the track and trace system run in that country. More specifically, test frequency has been found to be substantially more important than test sensitivity in tracking the virus and counteracting outbreaks[vi]. While there can be false negatives and positives from poor sensitivity, what matters most is being able to detect proportional increases in infection rates sooner rather than later. Any government that does not have an efficient or decisive system will struggle to contain waves and outbreaks, which helps explain why China and Germany were so adept in containing the virus.
One key debate that keeps circulating regarding the virus is whether opening up economies is worth the risk of further outbreaks and a second wave. Some countries, such as Iran, have already announced they will not be able to shut down again. From a medical standpoint, the death rate from the virus would be weighed against the number of deaths caused by poverty or neglect. The number of deaths caused by lockdowns is likely to be the subject of many future studies. However, only the death rate attributed to the virus can currently be fully examined and estimated. At the start of the global crisis in March, the COVID-19 death rate estimates ranged from 0.1%, comparable to that of flu, to 2%. Scientific studies have since narrowed that uncertainty somewhat to a range of figures between 0.5 – 1.0%[vii]. The current discrepancies are partially due to uncertainty over true infection rates, stemming from two large information barriers that we are all aware of; that most governments cannot conduct as many tests as required to fully track the virus and that the virus figures have become political, with some countries not publishing representative figures. Irrespective, the fear of overloading hospitals has lessened, and many healthcare systems are confident that they have capacity for a second wave[viii]. Furthermore, drugs such as Remdesivir will aid in reducing the death toll. A second wave of COVID-19 will, however, exact a sickening toll on populations if the virus is allowed to spread unchecked. As an illustration, Imperial College London have estimated that the lockdown in Europe saved around 3.1 million lives[ix].
To determine whether an open economy is worth the risk from an economic perspective, we can evaluate whether it has been worthwhile for those countries that retained more permissive restrictions in the first wave of global infections.
Figure 2: The relationship between changes in a country’s number of new cases per month and the changes in a country’s PMI figures for that month. The relationship is assessed for countries with a low stringency index compared to the proportion of their tests that are positive[x]. A line of best fit is shown for both scatter graphs[xi]. The number of cases is on a logarithmic scale to account for the exponential nature of a virus spread.
Figure 2 assesses the economic performance of countries that have been the most lenient with virus-related restrictions considering their respective infection rates[xii]. Most of the countries are those you would expect from recent headlines, including Sweden, Brazil and the United States. The figure illustrates a strong negative relationship between COVID-19 figures and economic figures, particularly in services, which suggests that not locking down does not save an economy. The public has tended to take matters into its own hands by reducing its activity and exposure without the need for enforcement, as exemplified by the response in Sweden[xiii]. Sweden’s economy slowed just as much as its European counterparts that went into lockdown and yet its neighbouring countries have made much more progress in reducing infection rates. Hence, unless there is a change in behaviour towards increasing virus levels, a surge in virus levels should almost be avoided at all costs – especially for developed economies that are highly concentrated in the services sector.
While countries are enjoying their new liberties, they should err on the side of caution at all times. Rapid tracking, tracing, and countering has proved very effective, but many countries are yet to be able to instigate such a diligent system and much uncertainty remains in best-practice to safeguard against the virus. However, it will be difficult to justify risks taken if they lead to a second wave of infections, which would cause severe damage, when a second wave does not appear to be an inevitability.
[i] https://ourworldindata.org/covid-cases
[ii] https://www.nature.com/articles/d41586-020-02058-1
[iii] https://wellcomeopenresearch.org/articles/5-67
[iv] https://www.cdc.gov/mmwr/volumes/69/wr/mm6919e6.htm
[v] https://www.globaltimes.cn/content/1194123.shtml
[vi] https://www.medrxiv.org/content/10.1101/2020.06.22.20136309v2
[vii] https://www.nature.com/articles/d41586-020-01738-2
[ix] https://www.bbc.co.uk/news/health-52968523
[x] https://ourworldindata.org/coronavirus/country/united-states?country=~USA
Conducted on a subset of countries where the ratio is low for Stringency index (the maximum employed this year) versus total cases (logarithmic)/no. of tests. This effectively determines countries that have not employed strict measures in line with the danger to their citizens compared to the rest of the world. The model is simple so subject to flaws but as an approximation has been deemed appropriate.
[xi] The manufacturing line of best fit ignores two outliers, the services line of best fit ignores on outlier.
[xii] The countries that exhibit this characteristic and also have PMI figures are Sweden, Brazil, Mexico, Qatar, Nigeria, Indonesia, Colombia, South Africa and the United States. Only Sweden, Brazil, Nigeria and the United States have Services PMI numbers.
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