RaboResearch - Economic Research

Four rays of hope amid the gloom of coronavirus


  • We are at war against a virus, which has a devastating impact on families and societies
  • The health crisis has morphed into an economic crisis. Hopes of a V-shaped recovery appear elusive, and are replaced by U- or W-shaped recoveries. It’s going pear-shaped, really
  • But this is an unprecedented situation, so we can’t just assume that the bearish outlook is set in stone. Never before have so many resources been channelled at finding ways to mitigate a virus. Hopes are pinned on vaccines, medicines, testing and increased health care capacity 
  • Plenty of cash is also thrown at households and businesses, but we should see more of this if the health crisis takes longer than policy makers currently envisage
  • If households come out of this crisis relatively all right, there will be a combustible mix of low rates, low inflation, rising asset prices, low inventories, and plenty of fiscal stimulus

Our big war

“We are at war against the virus”Emmanuel Macron

The early strategies to mitigate the spread of Covid-19 have failed, in particular in liberal democracies. In an increasing number of countries, including the US, the UK, and virtually all Eurozone member states, we have seen escalations over previous restrictions. Running short of critical care beds, governments are now resorting to suppression rather than mitigation. As time passes, it becomes increasingly clear that this pandemic is currently subject to a very simple calculus: preventable deaths take away individual liberties. In the meantime, virus fighting is now all about damage limitation, about ‘flattening the curve’ so our health care systems can cope. The only way we currently know how to achieve this is by minimizing physical interactions, by reducing transactions, and by obliterating demand.   

As we detail here, the economic fall-out can only be compared with war-like conditions. Indeed, any hopes of a V-shaped recovery in GDP already appear elusive before we’ve actually seen any hard data of the first leg of this V. Layoffs have started to explode, and many businesses and households have been plunged into immediate crisis because of their limited savings. Governments are stepping in with MMT’ish solutions, which is a very sensible thing to do, but a U or a W-shaped GDP growth profile still seems unavoidable at this stage. And this doesn’t even take into account the long-run productivity effects of this crisis (e.g. due to reduced capital investment, hysteresis, or onshored value chains). It’s going pear-shaped, really. 

Amidst this rising economic fall-out, the world has to up its virus fighting capacities. This takes time. We haven’t seen any miracle breakthroughs or silver bullets yet. Governments steadily try to build up capacity to care for the seriously sick by redeploying staff, or by ordering manufacturing firms to produce ventilators and clothing companies to produce face masks. Meanwhile, we have to count our losses and collectively realize that it will be a long, miserable haul before we either get to herd immunity or an effective vaccine.  

… but is there hope?

“Stop right there! We have already seen enough of these depressing notes… not again!” Everyone

Well, yes, indeed! At RaboResearch, we have a history of being bearish, so we figured we could at least offer a bullish contrarian view, even as this is not exactly our base case. 

Because a number of countries in Asia have actually shown that there is a way out, and not just in an authoritarian state such as China, or in the prosperous but fastidious island city-state of Singapore. The curve has also flattened considerably in South Korea, where early and large-scale testing and tracing helped authorities in getting the Daegu outbreak under control, or in Taiwan, which took preventive measures early on. 

Figure 1: Japan and South Korea have flattened their curves; real progress in the West is yet to be made
Figure 1: Source: Macrobond 

We’re now even seeing the first signs of progress in some European countries, as day-on-day increases in cases and fatalities start to level off roughly 7 to 14 days after these countries imposed lockdowns. This buys time, which is needed badly, to bring up solutions.

We are clearly no virologists or epidemiologists. But this is an unprecedented situation, so we can’t just assume everything’s set in stone either. There are plenty of unpredictable elements in the mix, but many economic analyses currently lean towards the negative tail risks, as analysts outbid one and another in order to surf the negative news flow.

No one can give any definite guidance, let that be sure, but in this piece we want to think of four potential noncompeting narratives which are more positive than our base scenario, even as they can’t avoid great short-term negative impact to societies and economies. 

  1. We could see a vaccine being developed in record time;
  2. We could find medicines that reduce symptoms, but don’t kill the patient; 
  3. We could see testing kits becoming available more cheaply, more timely and more plentifully; 
  4. We could see an increase in ICU capacity.

Four for hope

The sluggish and uncoordinated policy response in the West shows that we have all been taken by surprise, and that we were unprepared to cope with such an overwhelming shock. But as we regain our composure, we will also find that never before have so many resources been channelled at finding ways to mitigate or eradicate a virus. At some point, these efforts will yield solutions that allow us to continue to fight Covid-19 while limiting the economic fall-out. Many inventions have their offspring in wars or crises, and we’re all in this together. Once solutions are found, they will be copied across the globe.

1. Vaccines

A structural way out of this crisis is through a vaccine, which presents part or all of the pathogen to the human immune system. This prompts the immune system to produce antibodies to this pathogen. Having been provoked once, these antibodies can be quickly mobilised again if the person is exposed to the virus in its natural form. Even when only a part of the population is vaccinated, the viruses will have a harder time finding susceptible hosts. The outbreak will slow and eventually be contained as the population’s immunity gradually builds. 

There are several ways to produce vaccines, but in the 1995 movie Outbreak –a disturbing watch these days– the lead character found and isolated antibodies from a monkey’s blood plasma. Within days there was enough antiserum to cure all the people who were infected by a ‘Motaba’-virus. 

Yet truth may be stranger than fiction. Survivors of Covid19 also produce antibodies to the pathogen and their blood and immune system have ‘changed’. Scientists are now trying to use the plasma of these survivors to treat severe cases. And if the plasma is transfused in the early stages of the disease, it may ease the patient’s symptoms and save lives. Such an approach would accelerate the path to group immunity. But it is still a halfway house between a vaccine and a drug. It is also risky, a lot of work, and imprecise: the plasma contains antibodies to every pathogen ever encountered and the immune system might not directly focus on fighting Covid-19. 

This is why scientists have set their sights on ‘monoclonal antibodies’, which are synthetic antibodies targeted at specific diseases, in this case Covid-19. This is the holy grail and the focus of biotechnology research. Yet it is expected to take months if not years to do the research, selection and manufacturing of these antibodies at a scale large enough (and price low enough) to make an impact. There is a risk that the pandemic has waned before they are ready.

Taking such candidate drugs all the way to regulatory approval and widespread use normally takes years and years. Shortcuts can be made, but a biotech solution is still seen as a long shot and may not appear to be an appropriate solution for this crisis. 

Some of the research is therefore falling back on more traditional approaches, aiming to achieve immunization by using weakened forms of the virus. But this has drawbacks as well. The virus can continue to evolve in the host, potentially recapturing some of its virulence and making the recipient sick. Other strategies therefore try to construct vaccines by extracting the genetic code for just the “spike” protein, which locks on to the cells that line the human lung and helps the virus to gain entry. This part of the virus is thought to provoke immune reactions. Scientists then try to paste the genetic code into the genome of microorganisms such as bacteria and yeast, which should then produce large quantities of the protein. Finally, there are also companies or research projects which try to build vaccines from the genetic instruction itself. The international CEPI alliance helps with funding and coordination. 

Work on these vaccines already started in early January, almost immediately after Chinese authorities disclosed the genetic code for Sars-CoV-2, which is the virus that causes Covid-19. The early sharing of this sequence allowed research groups around the world to grow and study the live virus. The research is already quite advanced, given how recently the outbreak has started. Moreover, results from work on two broadly similar viruses, i.e. Middle East respiratory syndrome (MERS) and severe acute respiratory syndrome (SARS), were shelved after these outbreaks were contained, but are now being repurposed for Sars-CoV-2. 

Assuming a vaccine has been found and can be massproduced at short notice, it may only take a global inoculation campaign of say, several weeks, to allow a progressive lifting of containment measures.

2. Medicines

While all this work is taking place in parallel and the research’s bets are hedged, the development of a vaccine could still be over a year away. By that time the interest in a vaccine may already start to fade when large parts of society have been exposed to the virus in its natural form. For various reasons, previous vaccines to coronaviruses have never made their way through clinical trials.

But this means that the health care system remains under pressure, unless we could find an effective medicine that significantly reduces the severity of the virus. This would also reduce the number of seriously ill people that require hospitalization. And if with medication the virus starts to reflect a bad case of influenza, the ‘scare factor’ will go down. Perhaps we will then even let it run its course.

President Trump has touted chloroquine as an effective treatment for Covid-19, hyping it up as “one of the biggest game changers in the history of medicine”. Whilst we wouldn’t recommend taking medical advice from a ‘Dr. Trump’, chloroquine and hydroxychloroquine are antimalarial drugs that have been in use for decades. The drugs showed some promising results when they were tested against MERS and SARS. This was surprising, as malaria is caused by a parasite. Chloroquine is now also being tested for treating Covid-19, but the clinical tests are still in early stages. A scientific consensus hasn’t formed yet and chloroquine is not without side effects. So, again, please don’t take any (medical) advice from ‘Dr. Trump’.

Existing and already approved medicines that could be mass produced at reasonable cost would still be ideal, as they wouldn’t have to go through lengthy regulatory processes. But there are also experimental drugs, some of them in late stage clinical trials. Some hopes are pinned on Remdesivir, which is being developed by Gilead Sciences. This is an antiviral drug that promises to be effective in preventing viruses, e.g. Sars-CoV-2, from replicating. Gilead Sciences has recently asked the FDA to rescind the drug’s orphan status – which it had only just been granted. It’s hard to maintain that Covid-19 is a rare disease, and the status led to criticism that the pharmaceutical company would receive a seven-year monopoly on the sale of its product. If the trials are successful, decisions like this should eventually increase worldwide availability at modest prices, even as you would at first expect to see rationing. 

Altogether, hope is that we may still find a combination of existing medicines that reduces the pressure on the health care system. That, in turn, could allow containment measures to be relaxed in certain areas or for certain groups of people.

3. Testing, testing, and testing

Another way to get a quick grip on this virus is through testing, testing, and testing – an advice repeated again, again, and again by the WHO’s Tedros. In South Korea, for example, mass testing has been used to try and quickly identify and isolate those with the disease (n.b. complementary to testing, South Korea also uses invasive tracking methods based on data from credit cards, CCTV cameras and mobile phones – this still appears a bridge too far in Western liberal democracies). 

The most common test for Covid-19 is a PCR test, which tests for an active infection. This involves taking a nasopharyngeal swab, drawing mucus from the back of the nasal cavity where it meets the throat. This swab is then checked for the genetic footprint of the virus. Not very comfortable, but it does provide accurate results. Time is an issue, however. The tests are traditionally done in lab settings and take a few hours to complete, but when the time needed to collect, transport and process the samples is taken into account as well, it can be days before the actual result is known. During this period, the virus can still spread. 

On February 29, the US FDA relaxed its policies so research centres and companies could start to adopt new technologies that have yet to be approved for emergency use. There is of course a fine balance between speed and sound science, but this has paved the way for more, faster and cheaper testing. Ultimately, the production costs per test will be reduced significantly through gains in productivity –as we get to understand the virus better– and through economies of scale.

Another type of test measures antibody responses to the virus in blood plasma. These tests can tell whether a person has been infected in the past, because the body retains the antibodies against pathogens it has already overcome. This would be hugely helpful in forecasting the spread of the pathogen. We’re currently only seeing the tip of the iceberg, which are those who need hospitalization or intensive care. Estimations of what’s below this surface vary wildly: there are a lot of people who only experience mild symptoms, or who report that they were asymptomatic. Increasing this type of testing capacity is critical in understanding how widespread Covid-19 actually is.

Testing of blood plasma helps people to learn whether they have been infected or not. The odds of contracting Covid19 a second time are low –there have been a few reports of reinfections– and the existence of antibodies would allow them to move much more freely in society. This is especially valuable for those working in critical sectors, such as doctors and nurses. The UK government said it has bought 3.5 million of these tests, hoping to make them available "very soon" if these prove to be accurate.

Increased distribution of either PCR- or a blood plasma test would see us not yet having defeated the virus, but as time passes it will become more manageable. You could imagine that flights may resume if everyone is being tested before entering the airport, that production lines may become fully operational, and that we may see a return to the less intrusive social distancing measures rather than complete lockdowns. And if these tests do become cheap and truly mass produced, see for example here, the informational advantage compared to what we know now will be massive. It’s not that far-fetched to see breakthroughs here.

4. Increased ICU capacity 

Over the past few weeks, governments have started to look into ways to quickly boost the ICU capacity of their health care systems. Most importantly: the pressure to make wrenching triage decisions will diminish if there is more capacity. But from an economic point of view, it would also allow governments to lift the most stringent lockdowns a bit sooner. As health care systems can cope with higher peak loads, there is less need to drastically ‘flatten the curve’.

It’s almost a Cobb-Douglas production function. In order to boost Covid-19 treatment capacity, governments need to invest in capital (e.g. dedicated floor space in hospitals and much more ventilators), labour (e.g. doctors and nurses able to work these machines) and training

These would be longer-term strategic investments in normal times, but governments have to be creative now. As an example of this creativity, the UK government has ordered 10,000 ventilators from Dyson – a company best known for its vacuum cleaners (or its pro-Brexit founder). The company claims that it already has functioning prototypes, which were built up from scratch. These devices still need to obtain regulatory approval, but it is said that production could start in early-April. Dozens of other firms and consortia are trying to start or ramp up output as well, including the production of bare-bones machines. A downside is that this rush leads to protectionism: many countries have imposed restrictions on exports of medical supplies.

On the subject of creativity... Various governments, regional and national, have also launched efforts to source ventilators from veterinarians. The ventilators used on animals are almost identical to the machines used for those walking on two feet, and can be repurposed relatively quickly. There have even been reports that hospitals are exploring ways to use individual ventilators on multiple patients at once, but this appears to be a measure of last resort as it is not without risks.

Note that production is a function of capital and labour. There is no point in sourcing countless ventilators and other necessary equipment without having enough nurses in the ICUs to actually operate them. While nurse-to-patient ratios may be diluted a bit, (re-)training of staff needs to be stepped up as well, in particular as many will at some point be absent themselves due to illnesses or quarantines. In the UK, the Coronavirus bill enables recently retired nurses and students late into their training to register as healthcare professionals. But hospitals will also need to look at redeployment of staff from other areas, such as from operating theatres or anaesthesiology. These can assist the ICU nurses.

There is no obvious panacea. But a combination of these four non-competing narratives may help to bring this crisis under control sooner than is currently believed to be possible. There will be less need for full lockdowns, and containment measures could be progressively relaxed if there’s increased ICU capacity, testing, availability of medicines, and, ultimately, the adoption of vaccines.

Mainstream Monetary Theory

The coordinated nature of monetary and fiscal policy is unprecedented in recent history, and goes way further than we’ve seen at any point during the financial crisis. 

In the US and in the UK in particular, governments are trying to save the economy by creating a lot of cash. In fact, it is not a stretch to argue that the pledge from UK Chancellor Sunak to cover up to 80% of workers’ salaries through this crisis is a flirtation with a basic income. And also in the US, the 2.2-trillion-dollar-package includes around USD 500bn worth of means-tested helicopter money for US taxpayers.

Indeed, we have seen in the past couple of months that MMT has evolved from an esoteric line of thinking to Mainstream Monetary Theory; it turns out that we’re all social democrats in times of crisis. Only the Eurozone still needs to follow through with something really bold, but this may be just a matter of time.

Figure 2: More needs to be done!
Figure 2: Source: Macrobond

More needs to be done still, especially in light of the shocking increase in US jobless claims, the first ‘hard’ data point showing the severity of this crisis. The US consumer is still one of the key global economic players. But if households will receive enough cash to meet their basic budgetary needs –food, shelter, insurance– people could stay inside and sit this crisis out. And if businesses have enough cash as well, they can afford to stay shut for a few months and start re-hiring workers from Q3 onwards. 

It’s not painless, and we will see businesses fail, but if it’s done right there is enough productive capacity left to turn back on as the health crisis is brought under control relatively quickly. Hysteresis and other structural negative economic effects might then be limited.

Bull fodder?

The ‘Austrians’ may not like these cash infusions, because “inflation” or “socialism”, but if households indeed come out of this crisis relatively unscathed, the overall economy will face a highly combustible mix of low rates, low inflation, rising asset prices, low business inventories, and plenty of fiscal stimulus topping this all off. Having continued to receive income, whilst not been able to spend anything on discretionary items, pent-up household demand may provide just the spark needed to kick-start the global growth engine. 

And why stop there? If governments and their central banks continue to provide households and small businesses with cash, the global economy could finally reach escape velocity. Something good may come out of this crisis: it would make secular stagnation something of the 2010s! 

Oh well, hope springs eternal… 

Stay safe, all.

Stefan Koopman
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 71 21328

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