The document discusses the potential for an economic recovery following the COVID-19 pandemic. It notes that early signs suggest social distancing measures are slowing the spread of the virus. While the crisis is not over, governments have implemented massive fiscal and monetary stimulus packages to address liquidity issues and prevent a humanitarian crisis. However, the economic damage has already been done through lost productivity and jobs. A quick, V-shaped recovery is hoped for but not guaranteed, as some sectors may face lasting damage. Overall, optimism for recovery stems from the health rather than economic origins of the crisis, and the scale of coordinated government and central bank responses.

1. The Economic Bounce Back

2. Let’s make the optimistic assumption that this virus does not signal the
end of mankind as we know it. We survive this as a species and with
our civilization intact. We can then make the assumption (or reach the
conclusion) that we have either killed off the virus strain completely,
developed herd immunity which brings mortality rates closer to the
common flu or we’ve developed a vaccine for future outbreaks. At any
rate, the pandemic will be safely behind us and we can start to look
forward to rebuilding our productive lives.

3. This may seem a bit premature with the global infection cases about to
hit 1.5 million people but the early signs seem to suggest a plateauing
of serious cases (requiring hospitalisation) across the badly infected
states. Italy and Spain are hopeful of the new cases having crested and
are hopeful of seeing it fall. New York City- the worst hit area of the
United States, is also hopeful seeing the number of fresh admittances
to their overburdened hospital system peak this week. And a look at
the success of the tailing away of fresh incidences in Wuhan strongly
suggests that the quarantining method adopted by many outbreak
centres will put an effective brake on the exponential rise of the virus.

5. This is not to say that the pandemic is nearing an end: there are a number of
studies which point to both a recurrence of previous outbreaks (the Spanish
flu of 1918) after an initial peak ended and also models which suggest that
‘flattening the curve’ is at best a short term measure which could lead to a
more virulent outbreak later. But, at the moment, the nationwide lockdowns
of vast numbers of people either through mitigation theory (quarantining) or
suppression theory (social distancing) has retarded the pace of contagion to
below the recovery rate (the ratio is known as the Replication Rate). The
proactive actions of governments to flatten the curve will at least help in
ensuring that the critical care facilities available are neither overextended
beyond their availability nor exceed their elasticity of supply. This alone will
reduce the mortality rate significantly. All this is creating a surge in
enthusiasm for the end of the crisis- perhaps premature, which is translating
into positive sentiment for the markets.

6. This crisis has clearly not been a financial one but a health one. And
though we have talked about the elevated levels of equity fuelled by
low interest rates, ample liquidity and stock buybacks as well as the
growing mountain of debt in earlier articles, the cause for the rapid de-
leveraging of financial markets has been down to the sudden cessation
of economic participation by huge swathes of the productive work-
force. At the outset people were not laid off but asked to remain at
home. Although this has changed in the free-market economy of the
United States where the last two weekly jobless claims have printed 3.3
million followed by 6.6 million (for context, the worst number that was
recorded during the financial crisis in 2008 was 665 thousand) other
countries have softer policies.

7. Whilst the US has now passed legislation for a USD 2.2 trillion rescue
package that includes a one-time payment of USD 1,200 per adult and
USD 500 per child for those on the lower end of the economic scale as
well as loan facilities for companies on the grounds that they don’t fire
staff or do any buy-backs for a year, the UK and European countries
have instituted policies that pays a large portion of salaries (including
the self-employed) on an ongoing basis. In both cases, the workers are
being incentivized to stay at home with assurances of income to make
ends meet rather than this being an unemployment dole although the
US will need to see a sharp rebound in hiring immediately the
lockdown restrictions are lifted.

8. But these will serve to address the liquidity crisis and prevent a
humanitarian one. It won’t- as a standalone measure, avert an
economic slowdown. The statistics are already ruined; the damage has
already been done. Every country will report negative growth rates
simply because of the lost man-hours, destroyed jobs, falls in exports,
cuts in services, drops in productivity and so on. The data is still not
available as yet but 25% drops in QoQ are not off the median
expectations by a significant margin.

10. This is not going to be made up even if we returned to 100% normalcy. That
momentum that has been lost will prove elusive to re-start. The income
shock is going to affect discretionary purchases- especially those of durable
goods like cars, but also luxury spending which affects GDP
disproportionately because of their high value-add component. This will be
the after-shock part of the income contraction. Whilst some industries such
as electronic goods and food are expected to undergo the least lasting
damage due to the small portion of the annual household spending they
usually constitute (and/ or their necessity), the travel and tourism industries
are expected to face lasting damage. Oil- which shot itself in the foot, may
recover quickly if the competing interests of the major producers can align
better than they have managed so far. The airline industry will go belly-up
unless there is government intervention- they have high fixed costs-
including debt leverage, and none have any traffic with countries in
lockdown and domestic travel massively curtailed.

11. Hopes of a V shaped recovery remains the hope of most governments
who have opened up their fiat purse-strings and are in the process of
monetary and fiscal stimulus packages which are unprecedented in
scale even if it is all just a re-run of the 2008 crisis. The US package
includes a USD 425 billion guarantee to the Federal Reserve which will
act as a form of capital which will- in turn, allow them to create USD 4
trillion in extra liquidity to purchase corporate bonds. A lot of this is
being directed towards the high employment generator industries
which is a recognition of the fact that only consumer spending will kick-
start all economies again. In fact, a recent poll of economists suggested
a consensus of the demand shock exceeding that of the supply shock.

12. • So, optimism stems from the origin of the economic contraction- that it was a response to a
health crisis rather than a market failure or part of a boom and bust cycle, it stems from the
apparent success of swift, decisive action like Wuhan, Italy and India (complete lockdowns) even
though the longer term success may hinge upon further actions and it stems from the response of
government and central bank actions (fiscal and monetary stimulus packages; specific
employment and welfare guarantees). Whilst there is every reason to be doubtful that things will
return to normal quickly and there will be many sectors which will face long lasting damage, it is
reasonable to assume that a healthy workforce, forcibly withdrawn from the market, will return
to participate in the production/ consumption chain quickly. Personal balance sheets may take
time to recover but this is where the stimulus packages will have to play their role. In Spain there
is talk of the introduction of a permanent Universal Basic Income- another game changing
innovation sparked by the crisis. This is not the time to talk about deficits and debt build ups. The
stimulus packages will be backing up debt held privately with ultra-low rate central bank support
and moratoriums/ waivers on certain conditions. The likelihood of inflation will be much lower in
a period of destruction of economic surplus from a feedback loop of demand contraction, supply
contraction leading to demand contraction etc. So, the central banks have some leeway to
bootstrap out of a health crisis led recession.
• We’ll see soon enough if this is too rosy a set of assumptions.