Another one for the virus psychos, via McKinsey:
On March 23, 2020, McKinsey introduced the twin imperatives of safeguarding our lives and our livelihoods and a nine-scenario framework to describe potential economic and COVID-19 outcomes (Exhibit 1). At the time, we wrote that the best combined outcomes depended on a rapid and effective public-health response that controlled the spread of the novel coronavirus within two to three months. Similarly, in May, we wrote that crushing uncertainty by reducing the virus spread to near zero was likely the big “unlock” for most economies.
Today, only a handful of countries seem to have placed the virus under control. (Economic-policy responses have been strong in many regions; most have been swift and effective enough to largely rule out the “first column” of scenarios.) Practically speaking, only countries that have already placed the virus under control can plausibly realize a “first-row outcome” (scenario A3 or A4) that lifts GDP to 2019’s year-end level or better by the end of 2020. Absent a widely available COVID-19 vaccine, most other countries are likely facing a “second-row outcome” (scenario A1 or A2), which means a one- to two-year delay in economic recovery. Global executives seem to agree; as our July survey shows, their pessimism is growing.
The arithmetic is straightforward. Countries are starting to report estimates of second-quarter GDP. Germany and the United States have registered 10.6 percent drops since the fourth quarter of 2019, while Spain and the United Kingdom have reported almost unimaginable declines of 22.7 and 22.1 percent, respectively. From this trough, growth would need to average 5 to 12 percent for two consecutive quarters to return GDP to the level at which it started the year.
Our new research looking for visible indicators of economic activity that would suggest such a rebound in growth finds them only in the countries that have successfully placed the virus under control. The evidence heavily suggests that a multifaceted public-health response that goes well beyond a simple transient lockdown is a necessary first step to restore confidence and create the conditions for growth.
It won’t be cheap: the cost of getting the virus under control is likely measured in the billions, or perhaps hundreds of billions, of dollars. But it is also clear that the opportunity cost of waiting is almost surely measured in unknown thousands of lives and trillions of dollars. The impact of delay is not linear. For every three months we delay in getting the virus under control, we push back the return of GDP to precrisis levels by about six months. Time is the enemy of both lives and livelihoods.
What does it take to restart growth?
The novel coronavirus and subsequent lockdowns have halted economic activity in nearly unprecedented ways: the only events that similarly brought local economic activity to a sudden stop are currency crises, such as the 1994 Mexican peso crisis and the 1997 Asian currency crisis. There are no global comparable precedents since World War II. The economic impact has been dramatic, and it seems reasonable to assume that lifting lockdowns would provide a proportional stimulus. However, the facts now show that the ultimate economic impact is not driven solely by lockdowns, whose economic effects have been highly varied. Lifting lockdown restrictions may not by itself be sufficient to restart growth.
Our analysis shows that the actual or expected drop in GDP through June of this year across Organisation for Economic Co-operation and Development (OECD) countries is not as tightly correlated with the stringency of societal lockdowns, or their length, as one might think.1 Further, the volatility of the GDP decline in those countries is three times larger than the volatility of lockdown stringency. Variations in lockdown stringency appear to explain only part of the pandemic’s different effects on economic growth (Exhibit 2).
Similarly, detailed academic research using high-frequency data found no significant difference in employment and consumer spending between the US states that maintained longer lockdowns versus those that relaxed orders early (Exhibit 3).2 And an analysis of foot traffic at about 2.25 million businesses across the United States found that after controlling for local mortality rates, the differences in local lockdown restrictions accounted for only seven percentage points of the average 60 percent drop in local consumer foot traffic.3
It appears that more is going on than national or regional differences in industrial structure and government policy responses. Other factors are at work. As Germany’s central bank observed in June, “The behavior of consumers—and enterprises—became increasingly cautious. Rising uncertainty, including with regard to income prospects, subdued the propensity to spend, even on many goods that were not subject to lockdown.”4 That was anticipated by academic research, which estimated that the “uncertainty shock” generated by the COVID-19 pandemic would likely account for around half of the fall in US GDP in 2020.5
McKinsey’s new consumer research found that more than half of consumers say they are “cautious” or “uncomfortable” about reengaging in their daily routines.6 The research also pinpointed the factors that would make that group feel comfortable about reengaging. Around three-quarters of respondents are looking for structural solutions, such as COVID-19 vaccines and treatments. Only around 30 percent say they feel safer when government restrictions are lifted. Three other indicators would help, they say: seeing people wearing masks (75 percent), knowledge that the number of new cases is going down in their area (65 percent), and a determination from national public-health leaders that it is safe to reengage (56 percent).
The inescapable conclusion is that the uncertainty surrounding COVID-19 and its associated health risks has caused many individuals, households, and businesses to opt out of normal activity—even if no formal restrictions are in place. Eliminating that uncertainty is essential to restart growth.
Getting the virus under control
Building public confidence requires limiting the spread of the novel coronavirus and creating conviction that public-health measures will continue to be effective. To be confident, the public needs evidence of the following:
- New case counts are low, and testing is sufficiently widespread for official counts (and related indicators such as the rate of positive tests) to represent accurately actual conditions.
- The number of serious COVID-19 cases that require hospitalization can be effectively handled by the health system without impairing its capacity to deliver normal medical treatment.
- Communication about health interventions by leaders is credible, consistent, and provided sufficiently in advance to let families and the public and private sectors plan.
- Public-health measures are delivered effectively and are sufficient to prevent increases in transmission.
- Public-health interventions, including those deployed for high-risk and vulnerable populations, do not structurally prevent economic recovery.
The importance of getting the virus under control for restoring economic activity is now widely recognized. In a July policy statement, the European Central Bank warned that “the global outlook remains dominated by the evolution of the coronavirus (COVID-19) pandemic….[The] combination of the easing of containment measures and the increase in new COVID-19 cases in many countries renders the global recovery highly uncertain.”7
Similarly, the Federal Open Market Committee, which sets monetary policy in the United States, wrote for the first time in its July 29th policy statement that “the path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”8 When Jerome H. Powell, chair of the US Federal Reserve Board, was asked why that sentence was included, he replied that “the most central fact or the most central driver of the path of the economy right now, is the virus. … So it’s such an important sentence.”9
Confidence is necessary for growth
The recipe to achieve public confidence and establish the five beliefs we described has been tested in many countries, is now largely well-known, and takes about 12 weeks to enact effectively. Countries that have restored confidence—or are close to doing so—have seen economic activity return or begin to return to precrisis levels. Many analysts, including those at McKinsey, are watching indicators that might signal the return of economic activity well before official GDP, a notoriously delayed indicator, are published. Among those that we have studied, we find that “discretionary mobility” (defined as consumer activity in retail and entertainment, groceries and pharmacies, transit stations, and workplaces) neatly captures the choice to reengage in commercial activities. When paired with analyses of novel-coronavirus progression and virus-testing activity, we can see clearly how different strategies to get the virus under control have produced vastly different economic outcomes.
Exhibit 4 shows a synthesis of results from representative countries pursuing one of the two main strategies: the near-zero-virus and balancing-act paths.10 It also shows results from representative countries that are transitioning from the balancing-act to the near-zero-virus strategy.
Countries on the near-zero-virus path radically reduced viral spread, minimizing the chances of transmission and making it easier to control flare-ups as they occur. Leaders of those countries have built public confidence, and the public has responded by resuming economic activity, as seen in the rise of discretionary mobility to precrisis levels. The countries using the near-zero-virus strategy are likely headed for a first-row outcome—likely, scenario A3 or A4.
Countries on the balancing-act path have pursued a strategy that entails stabilizing the numbers of patients within the capacity of their healthcare systems while accepting higher virus prevalence, more frequent flare-ups, and the possibility of more economically restrictive public-health interventions. Under those circumstances, country leaders have found it more challenging to build and sustain public confidence. Discretionary mobility remains about 40 percent below precrisis levels. The countries using the balancing-act strategy may end up facing a second-row outcome, such as scenario A1.
The cost of delay
It is conceptually possible for a well-executed balancing act to keep the novel coronavirus under control, especially if healthcare innovations can reduce virus-related acute hospitalizations and mortality rates and if adaptive business innovations can enable productivity despite public-health restrictions. But no balancing act has thus far succeeded in the COVID-19 crisis.
Some of the largest eurozone countries started with the balancing-act strategy and then transitioned to the near-zero-virus one. By transitioning, those countries have largely controlled the virus (although more slowly than those that opted for the near-zero-virus strategy from the outset did, and they still face some flare-ups). Countries that have transitioned are raising discretionary mobility close to precrisis levels and have “won the right” to hope for a better economic outcome, such as scenario A2 or even scenario A3.
Countries that are currently pursuing the balancing-act path could transition to a near-zero-virus strategy and restore public confidence by the end of 2020 if they act quickly. Economic activity would remain muted temporarily, and those countries would need to invest tens or even hundreds of billions of dollars in direct costs, such as those for COVID-19 testing, tracking, and tracing—costs that are distinct from payroll and business support. But the opportunity cost could also be immense. We estimate, for example, that for every three months’ delay in getting the virus under control across OECD countries, the recovery of GDP to precrisis levels could be delayed by as much as six months (Exhibit 5).
Compared with January 2020 (precrisis) expectations, OECD countries could lose approximately $10 trillion in cumulative GDP by 2024. That’s an average figure across the A1, A2, and A3 scenarios. The differences among scenarios are even more striking: if a country were to end up in an A1 scenario, its losses could be 5.5 times larger than if had been able to navigate to an A3 scenario (Exhibit 6).
There are countless examples of unexpected shocks that have resulted in long periods of economic dislocation. The global financial crisis of 2008 hit the eurozone hard. The initial impact on GDP was only around one-third as damaging as that of the COVID-19 pandemic, yet it took seven years for eurozone GDP to return to 2008 levels. Even by the end of 2015, Italy’s GDP was still 8 percent below its 2008 level, Spain’s was 3 percent lower, and Greece’s was 27 percent lower. There is still time for countries pursuing a balancing-act strategy to increase their chances of achieving significantly better outcomes for lives and livelihoods.
Suck it up, psychos.
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