At Tricio’s monthly investment meeting this week, we discussed the risks of a second wave of Covid-19. None of us are epidemiologists so we have no special insight into the likelihood of a recurrence. But we tried to link what we have learnt from the experts, to how the economy and markets behaved in the first wave. We concluded that if the virus takes off again, any new lockdown won’t look like the first one. It will be less frightening, better managed and less damaging to the economy. More people are likely to continue both working and consuming.
The first wave is not over yet, of course, even in the developed countries. Infections and deaths are still significant, though clearly on a declining trend. Many epidemiologists fear that opening up social and economic life will send infection and death rates up again, a second wave. But they are not certain when or even if it will come. The behaviour of other viruses is not necessarily a guide. To paraphrase one expert …. ‘When you have seen one pandemic …… you have seen one pandemic’. This virus could take off again as soon as the lockdowns ease, or it could take a summer break and come back in the Autumn (quite a few experts suspect that) or it could come back but changed – perhaps less lethal, but also potentially more lethal. It could also fade out.
However, we think governments will respond differently next time. First, they will be better prepared, with more and better testing, effective test and trace systems, more and better PPE, and greater surge capacity in health systems. All of this should help limit the expansion of cases and also enable health systems to deal with it better. This will be especially true if the second wave is delayed until the Autumn, giving a few more months to prepare.
Secondly, rather than blanket lockdowns governments are likely to use test and trace to implement local lockdowns as a first line of defence. For example, everyone who went to a particular office or factory or restaurant will be asked to self-isolate. Or everyone who lives in a specific local area.
Thirdly, if they need to go further than this because the virus is taking off again, they are likely to work through the opening-up measures we have been seeing in May and June, only in reverse. So they will start with restricting the size of gatherings, then close restaurants and bars, then perhaps restrict households to meeting only one other person, depending on what is needed to control the R number. And the exact configuration is likely to be aimed at protecting businesses and jobs as far as possible. Governments will have to do this because businesses that have survived through the first lockdown will go under if there is a second one.
This more targeted approach will allow more of the economy to stay open. If a factory or construction site is closed then production stops. But it may be able to catch up using overtime later. Many service industries whose offices are forced to close may be able to mostly keep going, using working at home. Of course, if all restaurants and bars have to close again, they wont be able to catch up. But if one restaurant has to close because all the staff are staying home, diners may simply go elsewhere without any impact on overall restaurant spending.
What about demand? UK retail sales dropped 23% between February and April. You might wonder why they didn’t fall more with so many shops closed but food stores normally account for 38% of sales and they were doing better business than usual, plus there was a surge in internet purchases. Another indicator of household behaviour is the savings ratio. We don’t have good monthly data for the UK but the US household savings rate rose from 8.2% to 33% in that same period. We estimate that overall output was down 15-25% in April compared with normal.
At Tricio, we don’t think that kind of collapse in spending will be repeated. For one thing, as I just said shops are more likely to stay open. But also people will be less likely to freeze and do nothing a second time. If they can’t get to shops they will use internet shopping. They wont simply put their lives on hold again.
So a new tightening of measures due to a second wave will not be as devastating to the economy as before. We really hope it won’t be as devastating to lives either. There is still no cure for the disease, but even without a vaccine there are signs that some drugs and some procedures can help. We are hopeful of more good news on this front in coming weeks as the various trials underway report results.
Does this mean that the rally in stock markets is clearly onwards and upwards? No. For one thing, a second wave which required significant tightening of rules would be a setback for the economy even if it didn’t cause such a large collapse in output as in the first wave. It would put renewed strain on businesses most vulnerable to social distancing rules and those with high debts or weak cash flows. For another, we remain concerned about potential political instability and confrontations between nations (especially the US and China), which could upset the economic recovery. So, the risk of a major set-back in markets, re-testing the March lows remains significant. And we can’t entirely rule out another complete lockdown, which would be the last straw for many struggling businesses and would probably send stock markets to new lows.