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Managing the numbers for a possible return to work

The strategies adopted to combat Covid-19 are all based on delaying people catching it, to create time for scientists and doctors to find vaccinations and better treatments for it.

Business people at the airport, returning to work

by
John Redwood

in Features

07.04.2020

Today there will be a massive Japanese stimulus package of around $1 trillion. Markets expect no less. The Japanese economy fell sharply in the last quarter of 2019 and now faces a tougher lockdown as the government declare a state of emergency against the virus.  Much of the money will be borrowed at interest rates around zero, with markets underwritten by a Central Bank that stands ready to create money and buy the bonds to keep bond prices high. Given past experience, most market watchers think Japan will be able to do this without triggering inflation and worry just how much more output the country will lose despite these massive measures.

Meanwhile, the main preoccupation of markets worldwide remains how long most countries will need to keep large sections of their economies closed with all the financial strain that imposes. Yesterday some on Wall Street took heart from some apparent levelling off in deaths in Italy and New York. Their optimism was also fuelled by Austria announcing a phased relaxation of controls, with smaller shops allowed to re-open on 14 April and other shops by 1 May, to be followed by restaurants and hotels later that month. At the same time, Sweden was moving to increase controls, with the government taking legal powers to allow a closure of up to 3 months of various events and businesses.

The only country to have been through a bad attack of the virus and to have relaxed severe controls on any scale is China. Their experience shows that it takes time to gradually relax and that people are still worried about social gatherings. There is some distrust of Chinese figures, but the pattern seems to be some recovery in demand and output but no fast bounce back to previous levels. What is clear is the authorities use the death figures from Covid-19 as the rationale for the past controls and the present relaxations, as the Chinese death rate has fallen away rapidly.

Markets are looking at death rates and Covid-19 infection rates for their cues on when restrictions may be relaxed elsewhere. Predicting these is difficult in part because the figures are unreliable and calculated in different ways in different countries. The apparent death rates are very variable, from a high Italian rate to a low German one. This seems mainly to be a question of how the numbers are recorded. In Italy they concentrate testing on the seriously ill who attend hospital, so the death rate is high. In Germany, there has been much more testing outside hospitals, so they capture in the figures people who have mild versions of the disease. No country has good figures for how many people have caught the disease so far, and there is still no reliable test to establish who has had it. Some countries attribute death to Covid-19 in every case where it is present, whilst others do not count a death from some other pre-existing condition as necessarily a Covid-19 death if the patient catches it just before end of life. The UK emergency law and a recent change in ONS statistics makes higher reporting of deaths as Covid-19 deaths more likely. In China today doctors probably think the government, which has great influence, only wants deaths recorded as Covid-19 where there is no other reason present.

The strategies adopted to combat Covid-19 are all based on delaying people catching it, to create time for scientists and doctors to find vaccinations and better treatments for it. There is still no generally approved drug that will cure people, though various existing drugs for other problems and other treatments have their advocates and are being tested on some patients. All the time we are in this position authorities worry that too early a relaxation of restrictions could produce a second wave of infections with more deaths. Those in government charged with health responsibilities usually want longer lockdowns to play safe. Those charged with economic responsibilities want an early end to controls to save more jobs and businesses.

It looks as if the overall result is likely to be a slow progression to relaxation where the numbers produced by any given country give the government there an opportunity to announce some good news. I fear we know enough now to confirm our view that a swift V shaped recovery is very unlikely. We are still some days or weeks away from most individual governments declaring decisive changes in trend lines of cases and deaths, and weeks away from progressive relaxation of the fierce controls. There is hope that Italy and Spain may now have seen the worst of their numbers so we will watch their responses closely. As China and Austria demonstrate, once there is a change of tone at the top it takes time to unwind all the controls, and even longer for people to want to use all their new freedoms given the lingering fear of the virus and the damage done to many incomes by the lockdowns. This means more bad news on company earnings and cashflow to come before the ravages of the disease lift.

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