Ok. The world has been turned inside out and upside down by Covid-19. Many are in a state of panic and beginning to wonder, just when will things get back to normal, or at least when will they at least get better. Strategic marketing and business consultant, OKsuzi Strategy CEO, researched this very question and compiled the following information to help us all navigate the rough seas ahead.
The Great Wave, from the series Thirty-six Views of Mount Fuji (Fugaku sanjūrokkei)
When Will Things Get Better?
Safeguarding our lives and our livelihoods: The imperative of our time
“In Europe and in the United States, the required “lockdowns” of the population and other efforts to control the virus are likely to lead to the largest quarterly decline in economic activity since 1933.”
“We estimate that 40 to 50 percent of discretionary consumer spending might not occur. In every recession, people will cut back on purchases that can easily be postponed (such as cars and appliances), and increase precautionary saving in anticipation of a worsening crisis. What makes the coronavirus pandemic different is that people will also eliminate spending for restaurants, travel, and other services that usually fall but do not drop to zero.”
“A 40 to 50 percent drop in discretionary spending translates to a roughly 10 percent reduction in GDP—without considering the second- and third-order effects. That’s not only unprecedented in modern history, it has been historically almost unimaginable—until now.”
The Fed’s Loretta Mester says to expect ‘some really bad economic numbers’ before things get better - Paints a slightly rosier picture
Economic Forecasts:
It could take three years for the US economy to recover from COVID-19
United States Economic Forecast 1st Quarter 2020
“COVID-19 is an external shock (a random event that disturbs the economy) that has the potential to upend the trajectory of the economy.”
“Before the outbreak of the novel coronavirus, the US economy looked to be doing moderately well—our baseline was for growth, albeit fairly slow growth.” There were issues, though, so it wasn’t totally smooth sailing for the economy.
“From February to March—within one month—the average 2020 real GDP forecast from a Wall Street Journal panel of forecasters fell from 1.8 percent to 1.3 percent.2”
COVID-19 is affecting supply chains (e.g., people aren’t working) and people not spending (e.g., locked in their homes and/or losing jobs so not spending). (my summary of the impact of COVID-19)
And the financial markets are crashing, especially the part of the market that allows for short-term liquidity. This is where the FED is stepping in a lot.
The health of the economy in nine charts - 3 scenarios:
COVID-19 recession will hit. A vaccine in late 2020 will help bring things back under control. This scenario requires heavy involvement from the government in both fiscal and monetary policies. The US economy starts to recover in 2021 and goes up much faster in 2022 and 2023. 1.3% growth long-term. (50% probability)
Financial crisis and deep recession. Big drop in economic activity and this shows weaknesses in the financial structures, both for companies and for countries. A big recession happens as a result of several issues happening at once. Fiscal and monetary policies help end recession by mid-2021. Strong recovery in 2022.
Long hard trek to recovery. The impact of COVID-19 lasts for 2+ years, largely because of regional outbreaks that result in a drop in economic outlook for each region that is impacted. It takes until 2023 to actually see things stabilize. Growth of 3% as things recover. (20% probability)
What is going on behind the scenes?
The repo market, explained — and why the Fed keeps pumping hundreds of billions into it
Very scary reality of how the FED is keeping things propped up in a much bigger way than the average investor realizes. It looks like the FED started spending $80 billion/month, starting in October, to buy Treasury bills and replace maturing securities. That equates to about $400B to date. As a separate investment, the FED has purchased almost $4.5T in assets (mainly treasury bills in the market to help keep money flowing). These are really big numbers that have nothing to do with the $2T package that Congress just passed.
Bridgewater’s Dalio says Fed has done all it can, targeted fiscal stimulus is needed
The Implications of Hitting the Hard 0% Interest Rate Floor
Beyond coronavirus: The path to the next normal
The five stages that will help create the new normal after “the battle against coronavirus has been won” are: “Resolve, Resilience, Return, Reimagination, and Reform…The duration of each stage will vary based on geographic and industry context, and institutions may find themselves operating in more than one stage simultaneously.”
Resolve
“Efforts are under way to alleviate shortages of much-needed medical supplies. Business-continuity and employee-safety plans have been escalated, with remote work established as the default operating mode.”
“Resolve: the need to determine the scale, pace, and depth of action required at the state and business levels. As one CEO told us: ‘I know what to do. I just need to decide whether those who need to act share my resolve to do so.”’
Resilience
“A health crisis is turning into a financial crisis as uncertainty about the size, duration, and shape of the decline in GDP and employment undermines what remains of business confidence.”
“A McKinsey Global Institute analysis, based on multiple sources, indicates that the shock to our livelihoods from the economic impact of virus-suppression efforts could be the biggest in nearly a century. In Europe and the United States, this is likely to lead to a decline in economic activity in a single quarter that proves far greater than the loss of income experienced during the Great Depression.”
“Much of the population will experience uncertainty and personal financial stress. Public-, private-, and social-sector leaders will need to make difficult “through cycle” decisions that balance economic and social sustainability, given that social cohesion is already under severe pressure from populism and other challenges that existed pre-coronavirus.”
Return
“The weakest point in the chain will determine the success or otherwise of a return to rehiring, training, and attaining previous levels of workforce productivity. Leaders must therefore reassess their entire business system and plan for contingent actions in order to return their business to effective production at pace and at scale.”
Potential for new coronavirus crisis in winter 2020 if the virus comes back and that could lead to another “economic pullback.”
Reimagination
“A shock of this scale will create a discontinuous shift in the preferences and expectations of individuals as citizens, as employees, and as consumers. These shifts and their impact on how we live, how we work, and how we use technology will emerge more clearly over the coming weeks and months. Institutions that reinvent themselves to make the most of better insight and foresight, as preferences evolve, will disproportionally succeed.”
“The crisis will reveal not just vulnerabilities but opportunities to improve the performance of businesses…The result: a stronger sense of what makes business more resilient to shocks, more productive, and better able to deliver to customers.”
Reform
All businesses and industries must understand what changes to make to deal with global challenges, including ones like a global pandemic. And there will be innovations and experiments that could lead to the “betterment of society.”
ARTICLES:
The Fed Did Not Just ‘Spend’ $1.5 Trillion
Despite criticism from the left, there’s a strong progressive case for the Fed’s actions.
MARCH 13, 2020
BRYAN R. SMITH / AFP / GETTY
This week, the Federal Reserve announced that it would inject as much as $1.5 trillion into the short-term money markets, an intervention designed to ease the pressure on the financial system and lower the chances of a financial crisis.
This action received a lot of criticism from the left. The progressive standard-bearer Alexandria Ocasio-Cortez argued that “the amount that the Fed just injected almost covers all student loan debt in the U.S.,” and that “we need to care for working people as much as we care for the stock market.” Senator Bernie Sanders said, “When we say it’s time to provide health care to all our people, we’re told we can’t afford it. But if the stock market is in trouble, no problem! The government can just hand out $1.5 trillion to calm bankers.” Others described the injection as a gigantic subsidy for Wall Street.
Derek Thompson: Give people money immediately (another article to consider)
The progressive frustration was understandable: The Fed is a technocratic institution that has offered immediate resources to aid the markets. Yes, that makes bankers better off. No, that does not feel fair, not given the administration’s flailing, too-little, too-late response to the viral pandemic, something that is costing lives and livelihoods already. Broker-dealers get instant help; families get to wait for a meager expansion to food stamps.
Still, the online commentary was inaccurate both about what the Fed was doing and about why it was doing it. And there is a good progressive case for the Fed doing as much as it can to help the financial markets—and for Congress doing even more to help regular people.
A few technical points: The Fed did not spend $1.5 trillion. This was not a $1.5 trillion bailout. It did not cost Americans $1.5 trillion. It was not a $1.5 trillion subsidy for hedge funds and the like. It did not use up $1.5 trillion in resources that could have gone to another cause, whether Wall Street bailouts or Medicare for All.
The Fed works in weird ways, but here goes: The central bank announced that it would offer financial firms up to $1.5 trillion in short-term, collateralized loans. A firm can borrow $100 in cash overnight, for example, but only if it gives the Fed $100 in Treasury securities backed by the full faith and credit of the American government, and pays a small amount of interest too. Doing this costs the Fed nothing, and costs the American taxpayer nothing; when all is said and done, the central bank will probably make a small amount of money off the interest payments.
The Fed chose to do this not as a payoff for Wall Street or to calm the stock market. (It has nothing to do with the stock market at all, though equities crashing is in part a sign of the very financial strain the Fed is attempting to soothe.) It did it to help make sure that the market for Treasury bonds continues to function normally. It was not using taxpayer dollars to juice a money-losing industry, but instead acting as an emergency backstop for the markets writ large.
Signs indicate that it needs to do more, not less, in the coming days: The markets continue to act in strained and strange and erratic ways. Investment banks expect the central bank to drop interest rates to zero soon, and to begin purchasing huge sums of assets, something called “quantitative easing.” There is some chance, as well, that the Fed might end up setting up special facilities to supply liquidity to the financial system, as it did during the 2008 debacle.
Read: How the Fed let the world blow up in 2008
There’s a lot for average folks to like about what the Fed is doing, as much as it might seem arcane or technocratic or unfair. For one, recessions complicated by financial crises are much, much harder to fight, and much, much worse than plain-vanilla downturns: If the Fed and other central banks keep the markets functioning, that benefits everybody. But a credit crunch would hurt everybody. Businesses are already seeing revenue evaporate. Many will seek loans to help tide them over. Low interest rates and liquid markets will help those businesses, the families that rely on them for work, and the communities they serve.
That said, there’s a lot not to like too. Morgan Ricks, a law professor at Vanderbilt University and an expert on financial regulation, questions why markets needed this kind of emergency oxygen now, and whether the Fed should be doing more to make markets work, even in times of crisis, without the government’s help. The Fed’s repo transactions may not cost anything, but the Fed is still propping up the financial sector.
More broadly, one could argue that the extraordinary measures the Fed has taken in the past and is taking today contribute to the country’s inequality. There’s a deep, intuitive unfairness to monetary policy going to the mattresses when fiscal policy has not even gotten out of bed: The Fed is helping rich financiers, while poor families are unsure whether aid is coming.
But the economy needs both monetary policy and fiscal policy. The trillion-dollar repo facility did not create some kind of either-or scenario, with aid to hedge funds and financiers crowding out aid to student-loan borrowers and gig workers. And the real fault here—both during the Great Recession and now—lies not with the Fed, but with Congress, particularly Republicans in Congress.
Annie Lowrey: The coronavirus recession will be unusually difficult to fight
Democrats, acting with panicked muscle memory from the miserable exercises of the previous crisis, have proposed very aggressive fiscal policy, up to and including sending large monthly checks to every American household. A proposed rescue plan includes expanded unemployment insurance, paid sick leave, and more money for the Supplemental Nutrition Assistance Program. Republicans, still dismissing the severity of the pandemic, have suggested wan policies and slowed down the process. That means monetary policy is acting on its own. That means more joblessness and a sharper slowdown. That means lower-income families reliant on temporary work have no chance of recovering as fast as high-income families reliant on dividends and market returns.
Why couldn’t the Fed get creative and get into the fiscal-policy game? Why couldn’t it create $1.5 trillion and shower it on Americans? No less an authority than Ben Bernanke, the Fed chair who helped the country muddle through the Great Recession, has considered that scenario. It is possible, and at some point might become necessary. But it is not an option open to the Fed at the moment, since it would likely require a new legal framework and definitely require a lot of new policy infrastructure. (In one scheme, every American would incorporate as a kind of bank, then seek zero-interest loans. It would be weird.) Fed intervention in fiscal policy would also require, I imagine, Congress flat-out refusing to do its job and letting a downturn become a severe recession.
Let’s hope that does not happen. For now, the Fed is doing what it can to act as an emergency salve for the financial system. It is not preventing any kind of radical, progressive stimulus to help regular Americans, and is in fact signaling that there needs to be direct aid for regular people. America needs helicopter cash. It is up to legislators to shower it on them.
ANNIE LOWREY is a staff writer at The Atlantic, where she covers economic policy.
Goldman Sachs Predicts U.S. GDP to Shrink 5% in Second Quarter
The U.S. economy will contract sharply in late March and April as consumers and businesses slash spending, with the short downturn likely be officially deemed as being a recession, according to Goldman Sachs Group Inc.
The world’s largest economy will shrink 5% in the second quarter after zero gross domestic product growth in the first three months of the year, the firm’s economists wrote in a note Sunday. They cut their full-year forecast to 0.4% growth from 1.2% on expectations for growth of 3% and 4% in the third and fourth quarters and strong gains in early 2021.
“The uncertainty around all of these numbers is much greater than normal,” the Goldman economists wrote. Consumers and businesses will continue to cut travel, entertainment, and restaurant spending, while supply chain disruptions and tightening in financial conditions will further dent growth, they said.
Goldman’s projections followed U.S. Treasury Secretary Steven Mnuchin saying earlier Sunday that the coronavirus pandemic probably won’t tip the U.S. into recession, and came before the Federal Reserve cut rates to near zero.
The National Bureau of Economic Research’s Business Cycle Dating Committee, a panel whose determinations of when U.S. expansions begin and end are accepted as official, would probably classify such a sharp contraction as a recession even though it involves only one quarter of contraction, the economists said. They added that the group has previously said just a few months of contraction can meet its definition if it’s deep enough.
Meanwhile, growth is forecast to nearly halt in the second quarter and recession odds have jumped, Bloomberg’s March 6-12 survey of economists shows. Growth was seen slumping to a 0.1% annualized pace in the April-June period, while the economy now faces a 45% chance of a recession over the next 12 months -- the greatest odds since February 2009, when the economy was still in the midst of the last recession.
Safeguarding our lives and our livelihoods: The imperative of our time
By Sven Smit, Martin Hirt, Kevin Buehler, Susan Lund, Ezra Greenberg, and Arvind Govindarajan
We must solve for the virus and the economy. It starts with battling the virus.
Everything has changed. Just a few weeks ago, all of us were living our usual busy lives. Now, things normally taken for granted—an evening with friends, the daily commute, a plane flight home—are no longer possible. Daily reports of increasing infections and deaths across the world raise our anxiety and, in cases of personal loss, plunge us into grief. There is uncertainty about tomorrow; about the health and safety of our families, friends, and loved ones; and about our ability to live the lives we love.
In addition to the immediate concern about the very real impact on human lives, there is fear about the severe economic downturn that may result from a prolonged battle with the novel coronavirus. Businesses are being shuttered and people are losing their jobs. We think and hope there is a different option from the ones posed in a recent Wall Street Journal editorial that suggests that we may soon face a dilemma, a terrible choice to either severely damage our livelihoods through extended lockdowns, or to sacrifice the lives of thousands, if not millions, to a fast-spreading virus. We disagree. Nobody wants to have to make this choice and we need to do everything possible to find solutions.
Why is this the imperative of our time? From multiple sources and our own analysis, the shock to our lives and livelihoods from the virus-suppression efforts could be the biggest in nearly a century. In Europe and in the United States, the required “lockdowns” of the population and other efforts to control the virus are likely to lead to the largest quarterly decline in economic activity since 1933. We have never in modern history suggested that people not work, that entire countries stay at home, and that we all keep a safe distance from one another. This is not about GDP or the economy: it is about our lives and livelihoods.
We see enormous energy invested in suppressing the virus, while many urge even faster and more rigorous measures. We also see enormous energy go into stabilizing the economy through public-policy responses. However, to avoid permanent damage to our livelihoods, we need to find ways to “timebox” this event: we must think about how to suppress the virus and shorten the duration of the economic shock (Exhibit 1). And we must do both now!
To solve for both the virus and the economy, we need to establish behaviors that stem the spread of the virus, and work towards a situation in which most people can return to work, to family duties, and to social lives.
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To date, the only proven way of containing the virus, once community transmission is widespread, is by enforcing significant lockdowns; disciplined physical distancing; testing; and contact tracing. China, Japan, Singapore and South Korea have shown that these measures can stop the virus from spreading and enable economic activity to resume, at least to some extent. Everyone is closely following the developments in Italy and many other nations to find out whether the control measures there are sufficient to slow the growth of new infections and fatalities. Our common goal must be to implement the best possible response to stop this crisis.
At the same time, global and local leaders are also considering the economic impact of such measures. What will happen if many businesses stop operating or have to significantly reduce their activity? For how long can we do that? How deep an economic shock can we sustain without causing human suffering that our societies are unable or unwilling to bear?
In the following sections, we offer ways to think about these pressing issues. (Please also see “Beyond coronavirus: The path to the next normal,” by our colleagues Kevin Sneader and Shubham Singhal, which tries to imagine what the future might look like.)
Exhibit 1
The imperative of our time
Dealing with the uncertainty related to COVID-19
The spread of COVID-19. How many new infections will we have? Is the mortality rate falling? Will the spread of the virus show any seasonality? Will a new strain of the virus evolve?
The public-health response in each country, state, municipality. Will there be lockdowns? Will it still be possible to go to work? Will factories be allowed to operate? Do we need to submit to an official quarantine center upon arrival, or can we self-quarantine?
The impact on the economy and our livelihoods. Will companies suffer and go bankrupt? Can the supply of essential goods and services be maintained? Will we have a job? How long will this last?
The consequences for our lives. Will we be able to avoid infection? Are our loved ones safe? Can we still train for the sporting event we have been preparing for? Can we earn university degrees, now that many schools are closed and exams canceled?
These and a million more questions are racing through our minds, adding stress to the already challenging reality of living in the time of the coronavirus.
Two things are reasonably certain: If we do not stop the virus, many people will die. If our attempts to stop the pandemic severely damage our economies, it is hard to envision how there will not be even more suffering ahead.
The impact of lockdowns on consumption and economic activity
We are learning what happens during a lockdown of the kind implemented in China, Italy, and increasingly across Europe and the United States: economic activity drops more sharply than any of us have experienced. People do not shop, other than for essentials; people do not travel; people do not buy cars.
We estimate that 40 to 50 percent of discretionary consumer spending might not occur. In every recession, people will cut back on purchases that can easily be postponed (such as cars and appliances), and increase precautionary saving in anticipation of a worsening crisis. What makes the coronavirus pandemic different is that people will also eliminate spending for restaurants, travel, and other services that usually fall but do not drop to zero.
A 40 to 50 percent drop in discretionary spending translates to a roughly 10 percent reduction in GDP—without considering the second- and third-order effects. That’s not only unprecedented in modern history, it has been historically almost unimaginable—until now.
Already, we have some factual evidence for an economic shock on this scale, such as the COVID-19-related economic downturn in China, and early indications in US “high-frequency data” such as credit-card spending.
The longer a lockdown is in place, the worse the impact on our lives will get. To visualize what this means for people in lockdown areas, imagine cab drivers whose customers are not allowed to go onto the streets; professional chefs whose restaurants have been forced to close; and grounded flight attendants, their planes parked at the airports—for months. With 25 percent of US households living from paycheck to paycheck, and 40 percent of Americans unable to cover an unexpected expense of $400 without borrowing, the impact of extended lockdowns for many, many people will be nothing short of catastrophic.
The answer cannot be that we accept that the pandemic will overwhelm our healthcare system, and thousands, if not millions, will die. But can the answer be that we cause potentially even greater human suffering by permanently damaging our economy?
Bounding the uncertainty around this crisis
The worst and most typical reactions for humans when confronted with high uncertainty are to freeze, or to jump to a simple answer, such as “this problem will go away as quickly as it came, it is just like the annual flu.” COVID-19 is particularly challenging in this regard because the majority of those infected will feel only minor symptoms, or none at all. It is an invisible but pernicious enemy. We must try to bound the uncertainty with reason and think about solutions within a limited number of scenarios that could evolve.
Next we describe the impact of COVID-19 on the world’s economy along two dimensions which will primarily drive the outcomes of the crisis for all of us:
The economic impact of the Virus Spread: the characteristics of the virus and its disease, such as transmission modes, rates, and mortality rates; and Public-Health Response, such as lockdowns, travel bans, physical distancing, comprehensive testing, contact tracing, health care provision capacity, the introduction of vaccines and better treatment methods
The economic impact of the Knock-on Effects of the public-health responses, such as rising unemployment, shuttered businesses, corporate failures, credit defaults, falling asset prices, market volatility, and financial system vulnerabilities; and Public-Policy Responses to mitigate these knock-on effects, such as policies to prevent widespread bankruptcies, support incomes for furloughed workers, and protect the financial system and the viability of the most affected sectors.
In terms of Virus Spread and Public-Health Response, we currently see three “archetypes” of interventions and outcomes:
A strong public-health response succeeds in controlling the spread in each country within two to three months, and physical distancing can be phased out quickly (as seen in China, Taiwan, Korea, and Singapore).
Public-health response succeeds at first, but physical distancing has to continue (regionally) for several additional months to prevent viral recurrence.
Public-health response fails to control the spread of the virus for an extended period of time, perhaps until vaccines are available, or herd immunity is achieved.
In terms of Knock-on Effects and Public-Policy Response, we anticipate three potential levels of effectiveness:
Ineffective: self-reinforcing recession dynamics kick in; widespread bankruptcies and credit defaults; potential banking crisis
Partially effective: policy responses offset economic damage to some degree; a banking crisis is avoided; but high unemployment and business closures mute the recovery
Highly effective: strong policy response prevents structural damage to the economy; a strong rebound after the virus is controlled returns the economy to pre-crisis levels and momentum, as justified by the economy’s fundamentals.
If we combine these three archetypes of viral spread and three degrees of effectiveness of economic policy, we see nine scenarios for the next year or more (Exhibit 2).
Exhibit 2
We believe that many currently expect one of the shaded scenarios, A1–A4, to materialize. In each of these, the COVID-19 spread is eventually controlled, and catastrophic structural economic damage is avoided. These scenarios describe a global average, while scenarios will inevitably vary by country and region. But all four of these scenarios lead to V- or U-shaped recoveries.
Other, more extreme scenarios can also be conceived, and some of them are already being discussed (B1–B5). One cannot exclude the possibility of a “black swan of black swans,” with structural damage to the economy, caused by a year-long spread of the virus until a vaccine is widely available, combined with lack of policy response to prevent widescale bankruptcies, unemployment, and a financial crisis. This would result in a prolonged L- or W-shaped economic trajectory. With the number of new cases expanding exponentially in many countries in Europe and in the United States, we cannot exclude these more extreme scenarios for now.
However, as we still have little information about the probability of more extreme scenarios, we focus on the four that are more tangible for now. Within the next week, we will add breadth and depth to this view, working closely with Oxford Economics to develop several macroeconomic scenarios for each country, and for the world.
Making it real: How this could unfold
With a little bit of luck, China will undergo a sharp but brief slowdown and relatively quickly rebound to pre-crisis levels of activity. While GDP is expected to drop sharply in Q2 2020, some signs of normal life are returning in Beijing, Shanghai, and most major cities outside Hubei. In this scenario, China’s annual GDP growth for 2020 would end up roughly flat, wiping out the growth of 6 percent we expected just three months ago. Nevertheless, by 2021, China’s economy would be on the way to regaining its pre-crisis trajectory, if not adversely affected by developments in the rest of the world.
In this scenario, the virus in Europe and the United States would be controlled effectively with between two to three months of economic shutdown. Monetary and fiscal policy would mitigate some of the economic damage with some delays in transmission, so that a strong rebound could begin after the virus was contained at the end of Q2 2020. This would place Europe and the United States in scenario A3 (Exhibit 3).
Exhibit 3
Even in this optimistic scenario, however, all countries would experience sharp GDP declines in Q2, most of which would be unprecedented. Consumer spending in most advanced economies accounts for roughly two-thirds of the economy, and about half of that is consumer discretionary spending. Real-time data suggests that spending on durable goods including automobiles in areas affected by shutdowns could fall as much as 50 to 70 percent; spending on airline flights and transportation could fall by about 70 percent; and spending on services such as restaurants could decline in affected cities by 50 to 90 percent. Overall, as mentioned earlier, consumer discretionary spending could abruptly fall by as much as 50 percent in areas subject to shutdowns.
While increased government spending would help offset some of the economic impact, it is unlikely to offset rapidly enough nor in full. We estimate that the US could see a decline in GDP at an annualized pace of 25 to 30 percent in Q2 2020; major economies in the eurozone are expected to turn in similar numbers when all is said and done. To put this in perspective, the largest quarterly decline in GDP in the 2008–09 financial crisis occurred at an annualized pace of 8.4 percent in Q4 2008. The pace of decline would far outstrip any recession since the Second World War (Exhibit 4).
Exhibit 4
A darker picture of the future
Of course, it is entirely possible that countries are not very effective in controlling the virus, or in mitigating the economic damage that results from efforts to control the virus spread. In this case, economic outcomes in 2020 and beyond would be even more severe.
In this more pessimistic scenario, China would recover more slowly and would perhaps need to clamp down on regional recurrences of the virus. It would also be hurt by falling exports to the rest of the world. Its economy could face a potentially unprecedented contraction.
The United States and Europe could also face more dire outcomes in this scenario. They could fail to contain the virus within one quarter and be forced to implement some form of physical distancing and quarantines throughout the summer. This could end up producing a decline in GDP at an annualized pace of 35 to 40 percent in Q2, with major economies in Europe registering similar performance. Economic policy would fail to prevent a huge spike in unemployment and business closures, creating a far slower recovery even after the virus is contained. In this darker scenario, it could take more than two years before GDP recovers to its pre-virus level, placing both Europe and the United States in scenario A1 (Exhibit 5).
Exhibit 5
The economic impact in these scenarios would be unprecedented for most people living today in advanced economies. Developing countries that have faced currency crises have some experience in events of this order of magnitude.
We are not writing to predict that this will happen but rather issuing a call to action: to take the measures needed to stop the spread of this virus and the damage to the economy as quickly as humanly possible. As we write this, countries in Europe and the United States have not yet taken the strong public-policy responses needed to effectively contain the virus. If we do not act to contain the virus quickly, then the scale of economic destruction that comes with extended lockdowns would become more likely, with severe consequences for our livelihoods.
Safeguarding our lives and our livelihoods
To solve the conundrum of how to save lives without destroying our livelihoods, we must find ways to make lockdowns effective, such that they break the trajectory of the virus in as short a time as possible. The effectiveness of lockdowns will be measured in their ability to control the spread of COVID-19.
East Asian nations have shown this can be done through enforcing stringent lockdowns, surveillance, and monitoring of people’s movements. As we write this, similar actions in most of Europe and the United States have so far been narrower, less vigorous, and not as effective. To be sure, these steps are challenging to enact in the West. But to break the momentum of the virus, we must act decisively.
The world’s answer to breaking the conundrum will need to be robust, no matter whether we fully control the spread of the virus and prevent recurrence (ahead of vaccines or treatment innovations), or whether we cannot fully contain the virus and need to rely on continuing interventions for some time. In both cases we must find ways to protect lives and livelihoods.
We propose to move much faster in establishing comprehensive and clear Behavioral Protocols to allow authorities to safely release some parts of the blanket lockdown measures that choke our livelihoods today. These can only work if we also find Acceptable Enforcement Mechanisms for these protocols so that we do not run the risk of placing socially unacceptable demands on people.
Behavioral Protocols
These protocols are guidelines on how to operate businesses and provide government services under pandemic conditions. Some of these protocols are already in use. Could they be more widely adopted?
Courageous healthcare professionals work in hospitals where the virus is rampant; they have strict rules regarding all aspects of their tasks, movements, and behaviors to keep them and their patients safe. Could your supermarket operate safely with these kinds of rules in place?
In high-tech factories in China today, every person must have passed a COVID-19 test. Everybody. How would you feel about entering a plane today, if you knew that every passenger, crew member, and maintenance worker in contact with the plane had tested negative for the virus?
Some restaurants have already shifted entirely to home delivery, changing their business model and protocols to adapt to the virus. Could you operate your own service business safely by adopting new protocols?
These protocols cannot be static. Today, lockdowns are often implemented uniformly for everybody, everywhere, regardless of specific infection risks. Imagine a world in which, based on a deep understanding of infectious risks, tailored sets of protocols with different levels of rigor could be implemented for every city, every quarter, and suburban neighborhood.
Such dynamic protocols are technically possible. Modern technologies and data analytics can help track and predict infection threat levels to vulnerable population segments and areas; protocols and public-health interventions can be dynamically adjusted to provide protection when and where needed.
With such protocols, lockdown measures could be eased faster, for more people, in more places, while still maintaining the effectiveness of public-health interventions to control the virus. Much greater availability of personal protective equipment and test kits is also essential, of course.
Acceptable Enforcement Mechanisms
This is the harder part. How do we get everybody to accept the consequences of creating and implementing such behavioral protocols? The areas of sensitivity are many, including our personal freedoms, right to privacy, and fairness in access to services. There are no uniform answers to these issues. The level of sensitivity in each of these areas differs by country, and there also are huge differences in what is socially acceptable. In each country, people will have to work together to find ways to enforce behavioral protocols that fit their specific situation and circumstances. But make no mistake, the starting point will not be pre-COVID-19 social and societal norms—it will be the blanket lockdowns now in place across many countries.
In Hong Kong, the government has extended COVID-19 testing to all arriving passengers. It will allow asymptomatic travelers with the disease to self-quarantine at home. But because of the high risk of further transmission, the country requires these people to wear electronic wristbands to “geo-fence” them in their home. Compliance is enforced with the threat of long prison terms for violations.
We will need to develop and enforce protocols that allow us, as quickly as possible, to release some of the most stringent measures in appropriate places. And for that to happen, each government will need to find effective, yet socially acceptable ways of enforcing these measures and new protocols.
We need a plan to achieve both imperatives—Now!
We will keep updating our scenarios, and we hope that in coming weeks we will have a better sense for which scenario the world is likely to follow. However, a few things are already clear:
This could be the most abrupt shock to the global economy in modern history.
There is a real risk for our lives and our livelihoods to suffer permanent and possibly irreversible damage from this crisis.
While we must take actions to control the spread of the virus and save lives vigorously, we must also take action to protect our livelihoods.
Behavioral protocols and dynamic interventions could help us release lockdowns earlier, get most people back to work, and get everybody’s lives back on track.
Angela Merkel said last week in an appeal to Germany, and others have echoed, our ability to come through this crisis will primarily depend on the behavior of each of us. The initial and immediate lockdowns are necessary to break the spread of the virus and save lives. We believe that with the right protocols in place, and people following these protocols, the lockdown constraints can be gradually released sooner rather than later.
The question is: Can the world work fast enough on these protocols, and can we get societal acceptance to enforce them? If so, we should be able to control the virus, soften the inevitable economic crisis to sustainable levels, and safeguard our lives and livelihoods.
That is the imperative of our time.
(A summary of the research above will be in a follow-up post entitled “Current COVID-19 Economic Scenario Summary”)
About the author(s)
Sven Smit is a senior partner in McKinsey’s Amsterdam office and a co-chair and director of the McKinsey Global Institute; Martin Hirt is a senior partner in the Greater China office; Kevin Buehler is a senior partner in the New York office; Susan Lund is a partner in the Washington, DC, office and a partner of the McKinsey Global Institute; Ezra Greenberg is an expert associate partner in the Stamford office; and Arvind Govindarajan is a partner in the Boston office.
The authors wish to thank colleagues Sanjiv Baxi, Matt Craven, Linda Liu, Mihir Mysore, Matt Wilson, Guilherme Chevarria, and Tao Tan for their contributions to this article; and Adrian Cooper, Scott Livermore, and Neil Walker of Oxford Economics for their contributions to the research.
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