Figure 1: Cumulative confirmed Covid-19 case globally

The global economy did not have the best of starting points before the crisis unfolded. It entered the Covid-19 period vulnerable after the US-China trade war, with global growth at only 3% by the end of 2019, and with 23 major economies in a manufacturing recession in the summer of that year. As a result, this “lockdown recession” is expected to be the steepest in almost a century, and only the fifth global recession in the post-WWII period.

Deutsche Bank analysts have revised their full year 2020 global GDP forecasts sharply lower, nearly doubling the ”baseline” contraction expectations for the US, European and global economy. Forecast revisions for the “protracted virus scenario” were also revised down significantly (see Figure 2).

Figure 2: Deutsche Bank Research Global GDP forecast

In a nutshell:

• Covid-19 has the highest transmission rate of any virus in over a century (and widest, impacting 187 countries in just over three months).
• It requires much higher rates of hospitalisation and intensive care admission rates than seasonal flu, including for younger adults.
• Without social distancing, Covid-19 transmission can completely debilitate major healthcare and hospital systems within weeks – hence the lockdown policies.
• Regardless of government-set reopening dates, people will sharply limit discretionary activity and spending until they feel “safe” (consumer spending is 70% of US GDP, and more than 50% of that spending is discretionary).
• Viruses are not stagnant, but mutate, and sometimes strengthen, as they adapt to the human condition (this is what happened during the 1918-19 ‘Spanish flu’ pandemic).
• High transmission in the Northern Hemisphere increases transmission to Southern Hemisphere countries now entering their winter which, in turn, then increases the probability of return back to the North in the autumn.
• “Back to work” policies during periods of high transmission create formidable litigation, insurance and employee management challenges for public and private institutions.
• A high percentage of both US and global populations live in urban-suburban settings. 

In order to effectively – and safely – reopen, we need to build an architecture to co-exist with the virus. The damage done by the economics of stoppage arising from lockdowns is just too enormous for more than a short-term response. But what would an effective Covid-19 architecture look like? At the very least it needs to include the following:

• Diagnostic testing to determine who has the virus (hence government targets on test volumes);
• Antibody testing to determine who might be immune from the virus;
• Fever testing to identify those who might be symptomatic; and
• Manual and digital tracing to determine who else may have been infected by the virus – people don’t remember who they have met and if they do, may not always want to name them.

Each of these testing and tracing initiatives have their own sets of weaknesses and shortcomings, so all the measures need to be implemented concurrently to eliminate any gaps.

In some parts of Asia, early, vigilant and broad-based testing has helped those regions move further along their exit paths. However, economies such as the US and, to an extent, the UK that failed to prioritise testing and tracing sooner, are having more difficulties with the phased re-opening of their economies.

“Immunity passports” (see Figure 3) also look set to become part of routine border controls where digital tracing and some form of health QR codes could become commonplace. The UK government’s Covid-19 recovery strategy (11 May) document⁴ outlines an intended two-week quarantine period for people arriving in the UK, subject to some exemptions.

Figure 3: Digital testing and immunity passports

Source: New York Times 1 March 2020

“Whatever we do, we must take care that the R does not exceed one”
Boris Johnson, UK Prime Minister

Figure 4: Transmission of the virus

Source: HM Government May 2020

Figure 5: The US is now more open than any Eurozone country

Source: Deutsche Bank, Google Community Mobility Report

While our analysts observe that differences between regions and countries remain broadly stable, they note that North Asia leads the way out of the pandemic, followed by the Nordics and, more lately, Eastern Europe. “Turkey, the Philippines, India, and Italy are the most shut down countries. New Zealand has opened up notably and is about to leave the UK as the laggard in G10,” reflects Winkler (see Figure 5 above).

When it comes to FX, the two major trends particularly relevant for EUR/USD, says Winkler are:

• The US is now more open than any Eurozone member state and is operating under more normal conditions than the Eurozone
• In the Eurozone, the core is diverging from the periphery. Specifically, Germany, Finland, Austria and the Netherlands are significantly more open than Italy, Spain, France, and Portugal. “If this European divergence translates into core economies recovering sooner and faster in the coming weeks, it could complicate progress on a joint fiscal response to the pandemic,” adds Winkler. 

Figure 6: Activity importance and risk matrix for reopening

Joyce sees a rise in what he calls “stakeholder capitalism where employees and customers become as important as shareholders, and where “resilience” becomes a more important piece of the environmental, social and governance (ESG) framework. For example, the resilience and security of supply chains will likely become more important than cost and speed – rethinking the “merits” of just-in-time supply chains.

In the meantime, Deutsche Bank analysts offer scant hope for much upside anytime soon and clear winners are hard to predict at the moment. They see economic activity in most regions of the world “advancing gradually over the quarters just ahead but remaining significantly below pre-virus levels through next year and substantially below levels that were projected for the end of 2021 as recently as several months ago”.

But the world is better equipped to deal with this pandemic and life after it than it has been in previous ones in 1918, 1957 and 1968. “Governments around the world have taken extraordinary steps to protect human life and support their economies,” reflects Deutsche Bank’s Henry Allen in his Konzept article: What prior pandemics can teach us today (13 May).⁶ “This offers the chance for the subsequent recovery to be significantly stronger than it could otherwise have been. Technology is already taking a leap forward. Indeed, the only reason why the covid-19 recession is not even more severe than it is, is because technology has allowed people to work and engage with the economy remotely.”