In economic data terms Covid-19 is in a category all its own. But as we enter a phase I would call ”peak horror” I’d like to share a view of the world that has a small light at the end of the tunnel.

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Before we look at any data, opinions or otherwise, it’s important to consider the lenses we use to examine the data, opinions and other news flow. Objectivity is a lofty, yet unachievable goal for us humans and philosophers all the way back to the Greeks have been reminding us of our own subjective biases. The world of ideas is as important as the world “out there”. The one informs and shapes the other.

Social philosophies shape how we see the problem

Covid-19 and the resultant global lockdown is bringing into sharp focus different views of the world. John Authers made the point in his daily newsletter with the comparison of two philosophies of social justice, namely, Rawlsian and Utilitarian. John Rawls book, The Theory of Justice, set out a framework for a liberal democracy based on “the original concept”. This is an idea of a society people would choose to live under if they had no choice of their position in that society. Thus, people seek to protect the most vulnerable. This humanities-based approach has been very influential and continues to be a key underlying value in western democracies today. We see it expressed in the NHS motto, “Stay Home and Save Lives”.

Utilitarians are a family of social philosophies identified with names like John Stuart Mill and Jeremy Bentham. This wide church uses several frameworks to examine ethical trade-offs and brings us the idea of “the greatest good for the greatest number”. At its heart utilitarianism is interested in the aggregate good for society. Economists of this school are the likes of Ludwig von Mises and Frederick Hayek. Quoting such thinking can brings accusation of callous trade-offs such as “lives vs the economy”, “baby boomers vs millennials”, “life vs money”. But, all of these oversimplify the matter we face as a global family facing down Covid-19.

Leaders have imperfect information

As a natural cynic I’m inclined to state that when faced with a crisis, governments take the action people demand of them first. We cannot assume some omnipotent power to know the future from our leaders. They react and they often make mistakes. When the pandemic broke there was very little information for governments to work on. It was very hard to assess how big the death toll may be. Governments around the world did what they thought best and went into lockdown.

Europe – An intractable problem

The central European problem of a single currency but multiple government bond markets and budgets remains. That issue is the lack of adjustment mechanism during a crisis due to this flawed arrangement. Covid-19 presents an urgent and worrying situation for Europe as the 26 March meeting of the European Council showed. Currently, no solution to this problem is in play. The European political and financial arrangements give the ECB scope for monetary policy, but all fiscal stimuli need to be agreed through member state budgets. Financial stress in the bond market is likely to cause the EU group of countries to either agree on some form of debt mutualisation or blink. Italian bond yields relative to German Bunds spiked at the end of March. Covid-19 will force some hard decisions in this area.

US – too big to Lockdown?

With the US being such a disparate collection of states and regions with a very different culture and structure (to China) its possible lockdown doesn’t have the same effects we’ve seen elsewhere. The data is starting to suggest this. Willingness of citizens to be subject to lockdown, challenges on testing across such a large population and large geography and a largely private and un-coordinated health system present a real challenge. Furthermore, the Republican party is significantly influenced by Austrian school and classic liberal school economists which are sympathetic to the trade-offs central to utilitarianism.

COVID-19 mortality data problems

Heavy readers of Covid-19 news flow will already be aware of the data problems posed by Covid-19 data. There are important differences between the “case fatality rate”, the “infection fatality rate” and the “crude fatality rate“. The actual total infection rate cannot be known unless 100% of all populations are tested. We can only estimate the case fatality rate because it is context specific. Therefore, we cannot compare the case fatality rate until this is all over and even then, there will be multiple rates for different countries, regions and times during the outbreak. Estimates suggest the case fatality rate may be higher than seasonal flu but less than MERS or SARS. But it’s too soon to say. Much of the data being shared online is full of noise and tells us very little about the actual risk of death from infection. As such with so many unknowns, lockdowns seem sensible and perhaps appropriate at least or long enough to “flatten the curve”.

The economic data

As economic data gets released on the effects of Covid-19 we can all be forgiven for wanting to turn the other way. The data coming on stream is truly horrifying. For the weeks ending 21 and 28 March 10 million Americans signed up for unemployment benefits. Non-Farm payrolls data shows a three million drop in a month which is the biggest rise in 60 years. Unemployment is expected to hit 32% in the US by the end of Q2. GDP in Q2 is expected to fall between 24% and 35% depending on which estimate you use. This is staggering in its severity. So staggering in fact that leaders will be forced to ask the hardest of questions about continuing with the lockdown. Mid-April will see corporate earnings calls for global corporates sending torrents of negative economic information onto the news wires. Projections for Q2 will become more accurate. Leaders will flinch.

Coming face to face with the big questions

Our leaders face some very tough decisions. Continued lockdown will create a very deep recession and may harm the global economy’s ability to recover. Re-opening a dormant but going concern is different from starting an entirely new business. Returning to your job is different to finding a new one. Re-opening economies risks a second wave of infections. As the economic crisis builds, we’ll very soon hit a point where a large proportion of the SME sector and some larger corporates face bankruptcy. My hypothesis is that this is when the policy makers blink and open the lockdowns and send everyone to work – albeit with some degree of social distancing. When this happens, we should expect an adjustment period of returning to work and other activities but with social distancing in place. This would be to prevent any second peak being too quick and too steep. Herd immunity is said to only be a factor at 60% infection rate of a population. Some estimate we are close to 50% now in Europe and the UK.

The calculation made here by leaders will be one of economic damage vs lives lost to the virus. They will, however, look for signs that the health system can cope with a second wave. A declining death rate and hospitalisation rate would be that sign. Italy has recently announced plans to begin to lift some of the strictest measures.

Bringing it back to you

The above analysis as a best guess suggests a few calls to action. As in many crises we should prepare for the worst while hoping for the best. As we enter “peak horror” we should be mindful of overcorrecting and not seeing signs of the turning tide. Those interested in investing into the markets to benefit from a recovery in prices are best advised to act now to set up accounts, get funds placed in readiness for a recovery in market pricing. Setting up new structures and accounts is taking longer due to our service providers and custodians themselves being in lockdown. Those running businesses should prepare for the second wave which is the “back to business but with social distancing”. This could last for three to six months and may mean adjustments to cost bases. Those looking to move across borders or invest across borders after lockdown should start preparations now to consider the implications. Some airlines are making plans for “social distanced flights”. We should all start preparing for the next phase.

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