COVID-19: pandemic update

Written by Kevin Lings

Globally, the number of COVID-19 infections has, once again, risen substantially during the past week. As at 23 March a total of 339 645 people are estimated to have been infected with COVID-19, which is up a staggering 157 155 infections in just one week.

The focus, in terms of new infections remains on Italy (which recorded an increase of 29 598 cases over the past week), Spain (a rise of 17 173 infections in the week), Germany (a jump of 12 598 infections during the week), and the United States (up 22 973 in the week). These four countries represent 56% of the weekly increase in COVID-19, although a total of 169 countries are reporting infections.

Unfortunately, despite an extensive lock-down in most of Europe, there is still no clear evidence that the rate of new infections is abating. Instead the number of deaths worldwide is now up at 14 717, but more positively at least 98 840 people have recovered from the virus, which means the number of active cases in the world is currently around 226 088. It is critical that the world will quickly get to a situation where the number of people recovering from the virus each day exceeds the number of new infections. Yesterday, this ratio stood at 9.3 to 1.0. In other words, nine more people are testing positive for the virus for every one person that is recovering. Two weeks ago, this ratio was down at 1.6 to 1.0.

In contrast, the rate of new infections in mainland China, where the virus originated, as well as South Korea (which has the most comprehensive testing programme in the world) continue to moderate meaningfully. In China, the number of new infections has slowed to an average of 26 per day over the past week – all from people flying into China, while in South Korea it is down to an average of 101 per day.

It is also extremely encouraging that out of the 81 454 people infected in China, only 6 188 still need to be treated. In fact, the city of Wuhan in China, the epicentre of the virus reported no new infections on Thursday last week and is slowly returning to business, including the opening of the railway station, the removal of car checkpoints, the return of some workers and even the re-opening of Starbucks. That does not mean things are back to normal. The streets are still relatively empty, food supplies remain difficult to obtain and prices are 300% to 400% higher than normal.

In South Africa, the number of infections has risen to 272, mostly in Gauteng, Western Cape and KwaZulu Natal. The government is trying to evaluate the success of the “lock-down” measures the President introduced just over a week ago and need to decide if more stringent restrictions are required. It appears highly likely that more restrictions will be introduced this week.

Economic impact update

South African Reserve Bank announced support

1. Interest rate cut of 100bps

Encouragingly, the South African Reserve Bank (SARB) decided to cut the repurchase rate (repo rate) by 100bps to 5.25% at its Monetary Policy Committee meeting last week. The decision was unanimous. The SARB last adjusted interest rates on 16 January 2020, when they cut rates by 25bps. Prior to that they cut rates by 25bps in July 2019.

The SARB also highlighted that despite substantial currency weakness in recent weeks, they do not expect that this will result in any significant upward pressure on inflation. In other words, the pass-through impact of currency weakness on inflation is now assumed to be extremely low and should not prohibit the SARB from cutting rates further. Especially given the expectation that the petrol price will decline by around R2.00/l at the beginning of April, due to the sharp fall-off in the international oil price, pulling inflation significantly lower.

2. Measures to improve liquidity in SA money market

Last week the SARB also announced a range of measures to improve liquidity in the South African money market. This follows concerns by many market participants that the lack of liquidity in the markets was pushing the cost of funding unnecessarily higher and that the bond market looked like it was “freezing”.

Overall, the recent 100bps cut in interest rates, the improved money market liquidity and the pending large reduction in the petrol price will certainly help to ease the current downward pressure on households and business sector. However, these measures cannot stop South Africa’s economic recession deepening significantly over the coming months or halt the further substantial increase in the number of people unemployed.

Global economic outlook

In terms of the outlook for the world economy, most global growth estimates continue to be revised substantially lower. The COVID-19 shock is now expected to produce a global recession, with all of the world’s major economies experiencing a sharp contraction in activity over the next three months. This means that for the US, the longest global expansion on record will end in Q1 2020. It also means that the global and local economic outlook debate should start to focus on gauging the depth and the duration of the 2020 recession, not whether or not there will be a recession.

For example, we have already adjusted the Q1 2020 growth outlook for China to a massive decline of 34% quarter-on-quarter, largely in response to the sharp-fall-off in retail sales and industrial production in February 2020. Economies closely tied to the China supply-chain (such as Korea and Taiwan) will directionally follow China’s growth path in Q1 2020, consequently, growth forecasts for these countries have also been substantially reduced. The economic debate is therefore focused on understanding when these economies are expected to return to growth?

For the United States and Western Europe, the COVID-19 shock will likely straddle the first two quarters of 2020. The decline in activity during March will likely be sufficient to tip both economies into contraction in Q1 2020, but the real economic impact is expected to be concentrated in Q2 2020, where both regions are expected to contract at a double-digit annualised pace. These outcomes are worse than were recorded during the global financial crisis or the European sovereign crisis.

While the COVID-19 shock is moving more slowly through emerging markets outside Asia, their vulnerability is increasing in a number of areas. In addition to their heightened sensitivity to falling global demand for manufactured goods and commodities, they are experiencing a significant tightening in financial conditions – including South Africa in the past week. Oil producers are experiencing concentrated terms-of-trade losses, while relatively weak public health systems in many emerging markets suggest that the spread of the virus may prove wider and take longer to contain.

Looking beyond the first half of 2020: scenario building

Given the apparent containment of COVID-19 in China and South Korea, it can be argued that the process of normalising China’s economic activity could start to emerge in H2 2020, boosted by monetary and fiscal stimulus. Under these circumstances, the depth of the current downturn could become a springboard for a strong snapback in growth towards the end of 2020 – the so-called V-shaped recovery. The speed and strength of the recovery in China is important not just in shaping global business confidence on its own but also because it is likely to be treated as a template for how other economies could rebound once the virus is under control.

This argument can be taken further to suggest that the aggressive containment measures in most of the other major economies will cause the number of active infections to peak at around 10 weeks after the surge in infections were first recorded. Under these circumstances, the fading of the virus threat should result in some resumption of economic activity in key parts of the world, that systematically gains momentum towards the end of 2020.

Unfortunately, the above scenario relies on at least two critical assumptions.

1. Aggressive containment measures are effective

Firstly, that the aggressive containment measures introduced in many countries will actually be effective in controlling the spread of the virus – so far there is still no indication that this will occur. If the virus cannot be contained, the virus outbreak will persist for longer than many people envisage, and consequently economic activity will remain restricted for a longer time, resulted in the emergence of more serious economic consequences including a credit crisis as household and corporate defaults surge, as well as a social crisis as unemployment rates surge. The widespread closure of many businesses would negatively impact world economic growth over the coming years.

2. Containment of re-infection in China and South Korea

The second key assumption is that the risk of re-infection, especially in China and South Korea, can be contained. A too rapid relaxation of the containment restrictions could result in a renewed surge in the virus. The policymakers in China face a critical dilemma: if their containment measures are removed too quickly, the virus could again start spreading, but if the restrictions are maintained then the recovery will be much slower. Ultimately, if the recovery in China falters or the virus outbreak remerges as the restrictions are removed, investor and business sentiment is likely to ratchet down again on fears that the economic destruction could be much larger than currently believed with the pandemic lasting much longer.

On balance, it is fair to assume that the various authorities around the world are likely to take a cautious approach such that the containment restrictions will remain effective for longer. This, along with the slowdown in global demand, will temper the pace of any potential economic recovery.