Below is an complimentary research note from Demography Unplugged written by Hedgeye Demography analyst Neil Howe. CLICK HERE to get daily COVID-19 analysis and alerts from our research team and access our related webcasts.
Consider this an update on the note I published two weeks ago (see “The Coronavirus Outlook: Worse than Expected?”) and on my extended commentary in my last podcast. (see “Yield Curve Steepens, Corona Spreads, Finns Take Leave, Pundits Fear the Bern.”)
Let me proceed here in three steps. My first step will be to give you my bottom line on the current outlook: Yes, it is indeed worsening. My second step—which will consume most of my word count—is my assessment of the situation in China: No, things are not what they seem in the Middle Kingdom. Finally, I offer some overall suggestions on how to think about COVID-19’s impact on the global economy.
The Current Outlook
The overwhelming majority of health experts and epidemiologists now believe that COVID-19 is now launched on a trajectory of uncontrolled spread across most countries of the world.
- See the recent Economist headline: “Experts Predict that COVID-19 Will Spread More Widely.”
- Or the NYT’s assessment that the virus “is now likely to become a pandemic that circles the globe, according to many of the world’s leading infectious disease experts.”
- Or the statement by Dr. Nancy Messonnier, director of the CDC’s National Center for Immunization and Respiratory Diseases, on the virus’ spread in the United States: “It’s not so much a question of if this will happen anymore, but rather more a question of when…”
- Or the quote from former CDC director Thomas R. Frieden, now head of a nonprofit dedicated to fighting epidemics: “It is increasingly unlikely that the virus can be contained.”
One fraught question is whether COVID-19 formally qualifies as a pandemic. To be a “pandemic,” a disease must (a) result from a new pathogen, which means that it will encounter little acquired immunity; (b) expand through sustained person-to-person transmission causing significant numbers of deaths; and (c) spread globally.
Put a checkmark on all of the above. COVID-19 is new. It is deadly. It spreads with sufficient speed and stealth that it evades the efforts of health authorities to contain it. And as for global, well, it has now infected people in 79 countries on every continent except Antarctica. Is that global enough for you?
Several experts have already testified publicly that COVID-19 is indeed a pandemic. Among these are Dr. Jimmy Whitworth, London School of Hygiene and Tropical Medicine; Dr. Eric Cioe-Peña, Global Health at Northwell Health Director; and Dr. Robert Glatter, Lennox Hill Hospital in New York.
Other experts will only say we’re “almost” at the pandemic stage, in part perhaps because the World Health Organization has still not called COVID-19 a pandemic—though, as of Friday, WHO raised its threat assessment from “high” to “very high.” So why is WHO holding back? Politics, mostly. WHO apparently sees its role as supporting national policy makers more than assessing the objective truth of the matter. WHO’s director-general Tedros Ghebreyesus was very open about it in Friday’s press conference: Calling a disease a pandemic “is unhelpful when you’re still trying to contain a disease.” In other words, don’t demoralize the folks on the front line.
On Thursday, Moody’s announced that the odds of a pandemic have risen from 20% to 40%. Again, Moody’s may be holding back from going over 50% out of respect for WHO. But they also may have qualms about telling investors that it’s likely to count on a future which will result (they say) in both U.S. and global recessions during at least the first half of this year.
But let me return for a moment to Ghebreyesus’ comment that national authorities are still trying to contain the virus. That would be relevant if these authorities were doing so successfully. But I see little evidence of that. “Community transmission” is the technical term for what happens when, for a significant number of infected people, national authorities can no longer trace any transmission link back to an outside contact. That is when we can say that the authorities’ containment efforts have failed. Alternatively, it is when we are certain that we no longer know the number of infected within our borders.
In China, that failure happened very early—probably back in December of last year. Ever since, every other country seems to be going into “community transmission” within about a month after their first infection. Until last weekend, WHO kept an updated list of countries known to have community transmission. (At that time, the list included China, Hong Kong, Singapore, South Korea, Japan, Taiwan, Vietnam, Iran, and Italy.)
But then, overwhelmed by new cases of unknown origin in many more countries, ranging from Australia to the United States and Germany, WHO has taken this list down. Now it simply lists countries in which transmission is known to be “local”—that is, no longer involving outsiders. That list now includes 21 nations, which are (in addition to the ones listed above) Australia, Malaysia, Germany, France, Spain, UK, Switzerland, Norway, Netherlands, Croatia, Greece, Finland, Denmark, San Marino, Thailand, Indonesia, UAE, United States, Canada, and Ecuador.
So with all due respect to the WHO director-general, I think this steady progression of infected countries into de-facto community transmission status testifies to the failure of official containment efforts. I’m not saying that some countries put up a better fight than others. I’m sure that Japan, Singapore, South Korea, and Italy can apply vastly more resources and expertise to this effort than Malaysia, Pakistan, Iraq, and Nigeria. (Sub-Saharan Africa as yet has no “local” cases, but I’m assuming this is almost certainly because authorities have not yet found them.) But my point is this: If even the high-capability countries are failing, what hope have we for the others?
Another way to appreciate the apparent uncontrollability of COVID-19 is by looking at the rise in the reported number of infected cases and of deaths outside of China. Thus far, these trajectories are following the exponential growth paths that we would expect of an uncontrolled epidemic. (See charts below.)
The reported number of deaths is still too small and stochastic to be analyzed in any detail. But look at the reported case number, which is now over 5,000. This case number has been doubling just about every 5 days over the past month. That conforms pretty well to the simple formula for an early-stage unchecked epidemic:
N = R0 ^ (T/S)
where N is the infected number, R0 is the average number of persons infected by each infected person, S is the average number of days from infection to transmission, and T (the variable) is days. Most studies of COVID-19 suggest that its R0 is about 2.3 and that its S is about 6 days. As expected, that generates an N that doubles about every 5 days.
Let me emphasize that I do not believe this official case number is anywhere close to representing the actual number of infected persons outside of China. It vastly underestimates the actual number—by a factor ranging perhaps from 2x to 100x depending on the country. (I outlined the reasons in my last note and will be revisiting them shortly in my discussion of China.) Many countries with the lowest reported case count to date—for example, in sub-Saharan Africa and the Mideast—are probably underestimating the most.
Suffice it to say that the actual number of infected persons outside China is far more than 5,000, and is more likely in the 50,000-100,000 range globally. Still, so long as the degree of undercounting is reasonably constant in each country, the growth path in reported cases should approximate the same exponential growth path of actual cases. That’s what I think we’re seeing thus far.
At the end of this note, I want to return to the big picture questions. How bad is this pandemic going to be? And how will it impact the global economy?
But first I want to raise the obvious counter-example to everything I have said up to now. And that is China.
So What’s Going on in China?
According to the official numbers being reported daily by China’s National Health Commission (NCH), cases and deaths in China have not only been declining relative to exponential growth over the last month, but they have also recently been falling in absolute numbers. Every day, it seems, the media are contrasting the negative news for case growth in the rest of the world with the positive news out of China.
Political leaders who want to minimize the pandemic threat now routinely point to China’s apparent success as if to say that the coronavirus is overblown and that China is showing the world that it can be contained with just a bit of concerted policy action. In his press conference last week, President Donald Trump repeatedly downplayed the pandemic threat by invoking the success of Xi Jinping who is working “so very, very hard” to fight the virus.
Let’s not even try to assess Trump’s motives here. (Apparently, Trump himself along with some of his supporters believe that the pandemic alarm is a deep-state “MSDNC hoax” to bring down the stock market and his presidency.) I want to sidestep that question. Let’s just assess the evidence and answer the factual question: Is it true that China demonstrates that the coronavirus can be contained?
My answer is this. At best, Xi’s draconian “shutdown” policies demonstrate that the transmission rate can be reduced somewhat. (I will get back to the obvious drawbacks and limitations of these policies for China’s economy.) But I do not think that these policies have resulted in virus containment. IMO, actual infections and deaths continue to grow in China.
And this means, in turn, that China’s daily official NCH numbers are worthless. They’re worthless not because they greatly underestimate cases and deaths for the same reason that official numbers would tend to do in any country. But they’re also worthless because they clearly falsify the trend. In other words, the gap between official and actual numbers in China is not only large, but it has been rising, not falling, over time.
Counting Infected Cases
Let’s start first with NCH’s official estimate of infected cases. Let me begin with the general opinion of epidemiologists and statisticians, which is that the vast majority of infected persons are not coming to the attention of Chinese authorities. That is mostly because the majority of infected persons are asymptomatic or only mildly symptomatic. (But keep this in mind: These persons are still capable of transmitting the virus to others.)
Then again, even if the infected persons are seriously symptomatic, many may still not get counted because they do not enter the maw of the Chinese hospital system. And in these third-world hospitals (China's great infrastructure boom emphatically did not extend to healthcare) that could be for many reasons.
- It may be because these sick people find that the hospital is full and is turning away new patients. Over the last few weeks, 12 new makeshift hospitals have been built in Wuhan (one every two days), yet still patients are told to go home after waiting for hours in long lines.
- Or it may be because they fear mistreatment by overstretched and untrained providers. (Quality of care is extremely uneven: Most doctors in China are untrusted, ill-paid and have little formal medical education.)
- Or it may be because they fear catching COVID-19 in the jam-packed wards if they don't already have it or catching another disease if they do. A proper quarantine holds only asymptomatic persons and removes them as soon as they turn positive. Few hospitals in Hubei province are able to achieve that separation: It's more like “mass internment,” to use the words of one Wuhan observer.
We can speculate all we want here. But let me tentatively estimate that only 10% to 20% of all infected persons are actually coming to the attention of health authorities.
OK, so far so good. But we're not done yet. Of those infected persons who do enter the clinics and hospitals, what share is actually diagnosed as infected by COVID-19? Well, it turns out--after an abrupt reversal and counter-reversal two weeks ago--every province in China is recommending that health workers not label any patient as infected until he or she tests positive in an analysis of fluid (usually nasal swabs) that looks for the virus' genetic signature. These tests are complex and labor intensive; specimens must be sent to distant labs; reagents are added and centrifuges are spun for hours; results are typically not available until two days later. Many hospitals are out of test kits; the labs are overburdened; and the jampacked wards may lack personnel to take the samples.
Why are hospitals running out of test kits—and labs running behind in their testing? Well, consider this: China normally experiences about 200 million flu cases a year (this estimate is based on the U.S. flu rate); that’s over 50,000 new influenza cases per day. Wouldn’t you bet that all these people would like to know whether they’ve caught COVID-19?
Most importantly, the test results (even when they are prompt and accurate) really don’t change much how doctors treat the patients. Since there is no cure for the virus itself, treatment consists mainly in trying to alleviate symptoms and thwart secondary infections.
Oh, and one more thing: False negatives are common--so patients that don't test positive are supposed to be retested at least once. This may be because the virus is not present in the upper respiratory system and so is not present in nasal swabs. Or it may be due to sample deterioration in the long transit times for delivery to a lab in China.
OK, so tell me, what possible incentive is there for overworked hospital workers to waste all this time on a test that (a) doesn't help them treat the patient and (b) only makes them and their political bosses look bad for failing to contain this dreaded plague? Not much. I can only imagine them thinking, to hell with this. Early on, back in mid-January, I think most health workers did feel a sincere obligation to report on this strange new virus. I think the numbers were more accurate back then… up maybe until early February. From then on, these workers have been just trying to triage their way through the day. And it was about that time, BTW, that the exponential growth path turned into a straight line.
So of all the COVID-19 infected patients admitted to clinics and hospitals, how many are actually being formally diagnosed as infected? Let's be generous and say that 25% are being formally diagnosed. Multiply 10-20% by 25%. That means that only 2.5 to 5% of all infected persons in the total population are actually diagnosed as such. So instead of 80,000--which is the official total caseload to date--, the actual number may be more like 1.5 to 3 million.
Now let's move on to the official death count, which is underestimated for many of the same reasons. Yes, it's true, compared to someone who is only infected, it certainly seems more likely that someone who dies will be under the care of a healthcare official. But again, as we have discussed, maybe three-quarters of these very ill patients will not be formally diagnosed as infected.
Keep in mind as well that patients can only be tested early (for the first 3 or 4 days) during their infectious or symptomatic phase. By day 6 or 7 or 8 of their symptomatic phase—when they are most likely to become very severely ill and may require ICU care—it is usually too late to test them for the virus. (We’re not certain of this, but it’s true for most influenzas.) So it’s typically not possible to wait and test very ill patients to gain more information about their infection.
In any case, you may be wondering: If a COVID-19 infected patient dies without a positive test, what will the doctor write as the cause of death when the patient dies? Probably something generic like “suspected viral pneumonia”--which is literally correct… it's a virus and the syndrome causing death was pneumonia. End of story. On to the next patient. Several interviews of Wuhan families confirm that this is exactly what the doctors write on the deceased's death certificate after being told, when the relative is admitted, that the patient likely has the coronavirus.
An astonishing on-tape interview conducted by Epoch Times (see video, 14:40) offers some lurid detail on what’s going on. Undercover (assuming the guise of a state official), the reporter asks a supervisor at one of Wuhan’s seven crematoriums about his recent workload. The supervisor starts out by complaining that all of Wuhan’s crematoriums have been working round-the-clock and over capacity since late January. He then says that of the 135 bodies he received the day before, only 8 were “confirmed” pneumonia deaths and another 48 were “suspected” pneumonia deaths. That’s a suspected-to-confirmed ratio of 7-to-1. He also adds that he is retrieving a surprising 60% of all bodies from homes, not from hospitals. Those dying at home are almost certainly not confirmed cases. (As an aside, he mentions that he is under strict orders not to divulge these figures to anyone other than state authorities.)
A large share of at-home deaths, of course, would increase the share of deaths not being accounted for. This share is probably much larger in the overwhelmed and locked-down cities of Hubei province than in other cities.
Corroborating with Statistical Models
Is it really possible that the official count of cases could be undercounted by as much as 20-to-1?
In my earlier post, I cited the work Neil Ferguson, founding director of the MRC's Centre for Outbreak Analysis and Modelling at the Imperial College in London. In the Imperial College’s original study, researchers found that up until January 18 the official numbers were undercounting cases by 100-to-1 or more based on early transmission from Wuhan by airline travel to cities outside China. Specifically, they found that infections in other cities implied a Wuhan case count in 2,000-4,000 range when China was officially reporting only 45 cases.
With more data, according to Ferguson, researchers are able to make a more accurate number. For the last few weeks, he has been citing a 5% to 10% undercount (official to actual infections) as his most likely estimate.
Jonathan Read et al. at the University of Lancaster looked at Wuhan from January 1 to 22 and came up with a similar estimate: a “case ascertainment of 5.0%.” Researchers at Jinan University in Guangzhou ran simulations and came up with a smaller undercount: 9-to-1. These researchers were careful to word their conclusion in a way that did not impugn health officials but rather urged them to implement stricter policy measures in light of the clear and present danger of the epidemic.
Charitable and Uncharitable Explanations
Let me now take a few steps back and discuss something that the media has rarely talked about, and that is the extreme difficulty of ascertaining cause of death from a viral infection. That is because this virus, which is really just an RNA molecule encased in a protein sheath, is exceedingly small and testing for it (as we have seen) is exceedingly difficult. It’s also because a virus can mysteriously combine with all sorts of other pre-existing conditions to cause death: everything from meningitis to congestive heart failure.
Most Americans know that the CDC calculates a total number of monthly and annual fatalities in the United States attributable to influenza. In recent years, these fatalities have run to something like 50,000 to 70,000 per year. (President Trump expressed shock at these numbers at his recent press conference.) But here is something most Americans do not know. The CDC does not calculate them by looking at medical records or death certificates. The CDC assumes, correctly, that even in America few hospitals or doctors have actually tested most patients for the influenza virus. Instead, what they do is infer the deaths statistically by comparing doctors' estimates of the total influx of flu cases in their area with changes in overall death rates. By measuring across enough areas, they can generate a very accurate estimate.
In other words, what we know about viral deaths is only through sophisticated statistical inference. It relies on a large infrastructure of participating clinics and complex modeling. And the final numbers often can't be generated until at least a year after the month in question.
China has no such method or infrastructure. So, officially, almost no one ever dies of the flu in China. That's not China's fault. China is still a poor country and probably feels it would do better to invest in other health measures. But here’s my point. How do you expect China to have an accurate real-time count of virus-caused deaths, when even the United States, which spends so prodigiously on public health, can't produce any such real-time count?
Sure, when the numbers are very small and local and when the interest is high--like back in Wuhan back in early January--maybe China could have mobilized the talent and interest. (Unfortunately, the evidence suggests that early bearers of bad news were severely disciplined, like Dr. Li Winliang, and that such mobilization did not occur.) Once the numbers get industrial, though, no nation--not even the United States--would be able to generate an accurate day-to-day number.
OK, what I have just offered to you is the charitable explanation for China’s undercount. Now for the uncharitable explanation, which is that China could easily have taken measures to achieve a more accurate count—but deliberately chose not to undertake them or at least not divulge their results.
One obvious measure would be to allow or even require doctors to keep a running tally of all “suspected pneumonia deaths” or of deaths from all types of lower respiratory infection. (Hubei province started doing this two weeks ago, but was quickly overruled by national health authorities.) This would give everyone, both in China and abroad, a much better general idea of what’s going on than insisting impractically on a positive finding from a polymerase chain reaction (PCR) test that looks for the RNA of the virus.
Another obvious measure would be to release real-time public data (collected by the NCH) on total deaths by month. Every country compiles such data. Everyone could then easily compare YoY monthly death totals to see how much—if at all—the January or February total is trending above what they were a year ago. This method would give a crude approximation of how the CDC compiles annual U.S. flu deaths.
China is doing none of these things. In fact, Xi has declined any disclosure (other than NCH’s official counts) and has refused offers of western help that involve data disclosure to western experts. Even more than that, China’s leadership has cracked down hard on all western journalists reporting out of China, instilling a virtual blackout on any "unofficial" stories on the coronavirus--and allowing virtually no reporting at all out of Hubei province. (Even as President Trump was praising Xi’s efforts, Secretary of State Mike Pompeo last week accused China of suppressing information about the epidemic and said its policy of censorship was having “deadly consequences.”)
Call me cynical, but FWIW I favor the uncharitable explanation. Yes, providing an accurate real-time record of RNA-confirmed virus cases and deaths is beyond China’s capabilities, especially in the overwhelmed Hubei province. It may be beyond any nation’s capabilities. But what accounts for China’s failure to undertake alternative counts that would greatly improve everyone’s understanding of what is actually happening there? Authorities may be deliberately refusing to collect and tabulate this information. Or—perhaps even more likely—the party leadership is indeed collecting such information but is simply refusing to divulge any of it.
Occasionally, the mask may slip a bit. On January 27 and again on February 1, Tencent News published case and death counts that were much larger than the official totals. In both cases, the counts were erased with hours—but not before being recorded by Tencent users in Hong Kong and Taiwan. In both cases, “confirmed cases” on Tencent exceeded the official number by roughly 10x. And deaths (ominously) exceeded the official number by over 80x. Some users assume that two sets of data are being maintained and that someone behind the scenes may be trying to leak the actual numbers. Other journalists within China have pointed out instances in which provincial authorities seem to be concealing case and death numbers that exceed the official count for that province.
A Bird’s-Eye Demographic Perspective
Now let me try to shed light on what's going on from a somewhat different perspective. I’ll start by asking you this: Do you have any idea how many people die in China on an average day? This may sound like a ghoulish question… but go ahead, make a guess in your mind. Now let me give you the answer. China has a population of about 1.4 billion people. It has a population mortality rate of 0.7% per year. That means 10 million Chinese die every year. And that means that about 27,000 die every day. Ordinarily, most of these die in hospitals… and from all kinds of causes--cancer, heart attacks, strokes, emphysema, traffic accidents, suicides, and from the complications of every sort of chronic health condition, from diabetes to kidney failure.
Next question: How many die from conditions or causes likely to be triggered by the coronavirus? Well, let me include any form of pneumonia and lower respiratory illness, and apply the same rate that we see in America. The answer is 700 to 800 a day. Because China has lots of pollution and is a nation of heavy smokers (especially men, which IMO explains the higher male death rate), let's just make it around 1,000 per day.
OK, I think you can probably guess where I'm going with this. China now officially claims to have well under 100 coronavirus death per day--a number that is no longer growing on trend. That is only 0.3% of its normal daily death toll. Quite frankly, that's a rounding error, way under the monthly, weekly, or even daily variation in fatalities. In fact, even if we just look at respiratory infection deaths, the official coronavirus number only accounts for 10% of these.
So now let me ask you. If you think the official numbers are correct…
- Why are China’s hospitals and health personnel report being so overwhelmed--and not just in Hubei province?
- Why are the crematoriums in Wuhan, as we have seen, reporting a six-fold increase in the normal daily workload? (So much so that, according to social media reports that included group selfies, funeral service teams from multiple provinces were sending volunteers to Hubei.)
- Why would the PRC’s top national leaders be locking down entire cities? Why, for that matter, would Xi Jinping say that the virus represents a “major test of China's system and capacity for governance” He talks of “wartime” conditions in which “there must be no deserters.”
- And why would levels of social and economic activity remain severely depressed in major cities throughout China—even after national authorities have urged China to “return to business”? (I’ll return to this shortly.)
Here's my explanation. The death toll is much larger than the official count: These extra deaths may not be labeled COVID-19 deaths, but COVID-19 is causing them. No one knows how many extra deaths. IMO, it's hard to imagine the PRC taking such extreme measures if the extra fatality count weren't at least 1,000 to 2,000 per day--and if that count weren't still rising. Keep in mind. Even 2,000 a day is only a 7% rise in China's overall mortality rate. But I reckon that would be enough to get Xi Jinping and his cadre plenty excited, especially if they see that this number is continuing to rise over time.
What’s Ahead for China
In responding to the rise of COVID-19, China’s biggest policy failure was not to identify and contain the new virus when the actual number of infected persons was still less than one or two dozen. According to retrospective statistical models, that threshold may already have been broken in December 2019, well before the disciplining of doctors at Wuhan hospitals on January 3, 2020, by provincial authorities.
By January 17, when the official case number was still frozen by authorities at only 41, models of infections spreading abroad suggest that there were already at least 1,000 infected in Wuhan. (Incredibly, Chinese social media posts were at that time mockingly referring to the virus as “patriotic” because it seemed to infect only those who left China but not the Chinese who stayed home!)
By the third week of January, it was obvious to everyone that the virus was uncontrolled in Hubei province and beginning to spread to other major Chinese cities. Starting on January 22 came the lockdown of Wuhan, followed by the lockdown of other cities in Hubei, followed by the cancellation of New Year celebrations and the extension of the New Year holiday—with authorities urging people to stay put. Across China, local city and provincial officials began instituting ad-hoc checkpoints on streets, at metro and train stations, and at airports. More recently, starting tentatively in the second week of February, national leaders have started urging China to go back to work.
Here’s what we can conclude about the Chinese government’s draconian response—that is, the lockdown of Hubei province and the suppression of social and economic activity throughout the rest of China. On the positive side, this response has unquestionably reduced the overall virus transmission rate within China. By creating a mood of national mobilization and alarm that deters most Chinese from venturing outside their homes, officials have achieved the “social distancing” that all health experts agree can help slow transmission. (BTW, the opposite of social distancing is the “social proximizing” activities of religious cults, which has helped accelerate the spread of COVID-19 in around Daegu, South Korea, and around Qom, Iran.)
But the negative side? Well, one negative side is enormous suffering imposed on the 22 million residents of Hubei province, the full dimensions of which won’t come to light for many months or years. And on the migrant rural underclass (those without official urban hukou residence) who are no longer being allowed to travel—either to their place of employment or back to their families.
China has a history of resorting to such extreme measures when the fate of the kingdom is at stake. It’s called cauterizing the wound. During the Great Famine of 1959-61, for example, the 40 million who perished from starvation were almost entirely rural or provincial residents who were forbidden to leave their hukous. Hunger was seldom noticed in the major cities. (Indeed, China continued to export food during those years.)
The other negative side is the lack of good options for China moving forward from here. Yes, the activity suppression policy has been effective at slowing the virus’ spread. But it has not stopped it. And more to the point, it cannot be sustained indefinitely. Most small businesses and informal workers cannot survive more than a month without any income. And, ultimately, no one will get paid unless people get back to work. That is becoming the government’s biggest worry. From fearing the spread of the virus, they are starting to fear an economic recession—possibly a serious one. As the February 24 headline in Foreign Policy puts it: “How Do You Keep China’s Economy Running With 750 Million in Quarantine?”
This opens up two future scenarios for the next two or three months. In one scenario, the recovery in economic activity happens very slowly. This risks economic disaster. In the other scenario, the economic recovery happens very quickly. But this risks accelerating the spread of COVID-19. Yes, some knowledge workers can work on-line from home. But in China’s economy, the vast majority of value-added takes place in industrial firms—and in personal services, sales, and retail--where lots of people have to congregate together in order to get anything done.
Dr. Lin Xiaoxu, former lab director of viral research at Walter Reed, predicts that a resurgence in Chinese economic activity is likely to trigger such a “second wave” of infections. (Second and third infection waves, which often accompany major viral epidemics like the Spanish flu, is itself a complex topic that I don’t have time to explore here.)
Most likely, I think, we’re going to see some of both. People will be cautious and slow about returning to full employment—which will depress economic output. But there will be a gradual return—which will speed up transmission.
At the moment, the real-time evidence points to a very slow return. So right now the danger lies more on the side of economic recession in China. Wherever you look, you see that key indicators of activity have hardly recovered at all since the lunar New Year shutdown. That includes average road congestion in major cities; daily passenger traffic (road, rail, plane, or ship); daily cinema ticket sales; and coal consumption. Containers waiting to be offloaded at Chinese ports remains extremely elevated.
These indicators could be chased down from various sources. But let me highlight here a few of those made conveniently available on the website of Capital Economics, a major research consultancy headquartered in London.
According to the NASA satellite imagery, levels of atmospheric NO2 over China declined dramatically from January to February. This indicates the cessation of most traffic and industrial activity. Over the last couple of days, we have seen China’s abrupt economic shutdown push diffusion indexes off a cliff. The government’s NBS manufacturing PMI just released for February came in at 35.7 and its NBS non-manufacturing PMI came in at 29.6. (This latter indicator has never been below 50 since it first started in 2007.) The Caixin manufacturing PMI came in at 40.3.
There are no good options. Essentially, China has to steer a path between Scylla and Charybdis—and it has to prepare for damage from either side. However long China can bear to suppress activity, I don’t believe it’s possible for China to prevent a nationwide epidemic in the weeks and months to come.
Estimating the ultimate death toll depends on our assumptions. First, let’s assume that the ultimate community infection rate is somewhere between 30% and 70%. Next, let’s assume that the population-wide case fatality rate is somewhere between 1.0% and 0.5%. That will generate total deaths of somewhere between 2 million and 10 million.
Hiroshi Nishiura, an epidemiologist at Hokkaido University in Sapporo, Japan, uses a model that generates a result in this range. Nishiura estimates that the outbreak in China will peak sometime between late March and late May. At that point, up to 2.3 new infections will occur on a single day. Roughly 40% of the population will get infected, and half of all cases will show no symptoms. Assuming a high and low case fatality rate, that’s a death toll of 3 to 6 million.
Any number between 2 and 10 million surely represents a major tragedy for China. Whether the actual total will ever be known—or whether, after the fact, Chinese authorities will ever divulge it to the rest of the world or to their own citizens—is, of course, another question. (According to one leaked document from the northwestern city of Chaoyang, provincial authorities are already starting to order that numerical data related to the outbreak be destroyed.)
What’s Ahead for the World?
Right now the best way to evaluate the spread of COVID-19 outside of China is to think about it as approximating the spread inside China with a lag of just over one month. On March 2, for example, the number of cases outside of China was 10,297 and the number of deaths was 152. That was approximately the number of cases and deaths in China as of January 30—9,692 and 213, respectively. That’s a pretty close fit.
During the next month or two, however, I expect that these two paths will diverge and that the rest of the world’s growth rate (especially in cases) to grow more rapidly than in China.
This will happen for several reasons. One reason is the greater extent of testing by better prepared health authorities in most other countries. Another is the greater transparency of public information and freer press; most countries actually encourage outside experts to review and assess the accuracy of their methods. Also, it would be difficult for most other governments to impose the sort of draconian shutdown China imposed on Hubei province (though the public mood may change).
In thinking about how the spread progresses, we can imagine three possible scenarios.
In scenario one, national health authorities somehow manage to contain the virus within the next few weeks and stop the pandemic in its tracks. Let’s call this the SARS or MERS scenario: Cases dwindle and the virus disappears. In this case, it turns out the WHO director-general was right all along. Well, I think this is the least likely scenario. In fact, it’s almost inconceivable. This is because COVID-19 is spreading so rapidly; has already spread to so many countries; and has reached an apparent community-transmission status in so many of them.
In scenario two, the virus suddenly changes its behavior—either in its speed of transmission or its case fatality rate—probably through a dominant genetic mutation. If this happens, the historical track record suggests it would probably be a favorable change, most likely a change toward lower fatality. (Killing one’s host is an unhelpful trait from an evolutionary perspective.)
This would be good news, of course. One might imagine COVID-19 mutating into something more in line with the common flu or (even better) with the common cold. I’ll come back to this later: Long term, next year or the year after that, this may well be the future of COVID-19. But there is no reason to expect this change to come soon and suddenly. It’s more probable it will come later and gradually,
In scenario three, which I fear is the most likely, the virus will continue to spread in its current pandemic fashion. And it will continue to give rise to illnesses and deaths much like we have seen around the world over the last two months.
In scenario three, the months of most alarming growth will occur in March and April.
What sort of eventual death toll could we expect? I will go through the same assumption exercise that we did for China. For Europe, it could range from 1.1 to 5.2 million. For Latin America, 1.0 to 4.6 million. For the United States, 0.5 to 2.3 million. You might want to compare these numbers with the “moderate” estimate of 14.2 million deaths worldwide just published by The Economist. (The “low” and “high” estimates ranged from 1.4 to 71.1 million.)
Needless to say, the range of uncertainty is vast. In almost any scenario, however, most high-income countries will sooner or later have to face the same choice that is facing China. And that is: How much should we slow the economy through “social distancing” in order to slow transmission and save lives? (Italy is facing that choice right now.)
These choices have important economic consequences. After all, the economic effect of an epidemic is determined not so much by what the pathogen itself does but rather by how people and public authorities try to protect themselves against it. Epidemics tend to impact the service sector with unusual speed and severity. In the U.S. economy, the service sector has been (until February’s “flash” Markit PMI, released last week) a tireless engine of growth. Whether that changes bears watching.
So what will be the economic effect of a global pandemic? Well, if COVID-19 continues to spread and infects a significant share of the population in most countries (scenario three), then I think the consensus of most economists is that this would result in a global recession starting no later than Q2 of this year. By “global” I mean a recession in all of the world’s major economies: China, Japan, the Eurozone, and the United States. (For Japan, this is not a hard call, since its GDP already plummeted by an annualized -6.3% in Q4 of 2019.)
How severe a recession? That’s even harder to say. According to The Economist (see again above), the peak-to-trough GDP decline could range from -1% to -10% depending upon the region and the epidemic’s severity.
Most of the world’s international economic organizations (UN, IMF, World Bank, and OECD) just released their “global outlooks” in January, before the virus was on their radar screen. All four were already ratcheting down their global GDP forecasts for 2020 since the summer of 2019. Most have not yet ventured a guess on the impact of the pandemic.
The one exception is the OECD, which on Monday released an update entitled, “Coronavirus: The World Economy at Risk.” Assuming a “breakthrough” outbreak that spreads beyond China, it projects a 2020 full-year decline in global GDP of 1.5 percentage points. This would essentially cut its estimate of 2020 global growth in half. The update feels like it had been prepared in mid-February. I expect to see more dire forecasts from these organizations in the weeks to come.
Historical perspective helps. It is often estimated that the Spanish flu caused a 5% decline in global GPD in 1918. But that estimate is complicated by the industrial powers’ demobilization after World War I. In the United States, the Spanish flu helped to trigger two back-to-back recessions, one that hit in 1918 and an even more severe downturn in 1920. (In the 1920-21 recession, wholesale prices fell by 37% and the Dow Jones Industrial Average plunged by 49%.)
There is, I think, a lingering optimism held by much of the public that the economic and human cost of Spanish flu was greater back then than it would be today due to our superior healthcare technology. And yes, some of these advantages will no doubt save many lives—especially the availability of antibiotics to fight secondary bacterial infections. But the ledger is not all positive for modernity. In particular, the world is vastly more mobile and urban in the early 21st century than it was in the early 20th—and, historically, transmission and infection rates in epidemics have always been much higher for those who travel, mingle, and live in cities.
Let me cite a wonderful monograph published by the St. Louis Fed back in 2007. It had a prescient title: “Economic Effects of the 1918 Influenza Pandemic: Implications for a Modern-Day Pandemic.” The authors make some observations that pertain very directly to today's headlines--such as the disproportionate hit on the service industry, the freezing of supply chains, and the supply-side shortages in available labor.
But after acknowledging the gains in healthcare technology, they conclude on a more sobering note. “Given our highly mobile and connected society, any future influenza pandemic is likely to be more severe in its reach, and perhaps in its virulence, than the 1918 influenza despite improvements in health care over the past 90 years. Perhaps lessons learned from the past can help mitigate the severity of any future pandemic.”
It’s important to emphasize, again, that most of the uncertainty we face is over the next three months. Over the following six months, the uncertainty will dissipate. Come the summer, the warmer and dryer climate (in the northern hemisphere) is sure to slow the pace of the pandemic. Later in the year, we will know a lot more about transmission and case fatality rates. We will have much speedier and more accurate PCR tests along with blood serum antibody-marker tests that will identify anyone in the population who has been exposed to COVID-19. These innovations will greatly improve our ability to monitor the virus’s spread.
By the end of the year, we may be rolling out antivirals specifically designed for COVID-19. And perhaps later, sometime in 2021, we may see an effective vaccine. In the years after that, we are likely to see COVID-19 take its permanent place as an endemic seasonal disease alongside the four other types of coronavirus (229E, OC43, NL61, and HKU1) that currently account for 20% of the world’s common colds. By then its case fatality rate should decline to much lower levels—as typically happens to new pathogens over time. (That’s the hope, anyway. To the extent that this 30,000-base RNA molecule has a desire, it’s not to kill us, but just to keep propagating while we keep walking around, healthy and happy.)
To be sure, even the long term has risks. We really don’t know how or whether the virus will mutate. And we certainly don’t know whether the apparent pandemic will trigger entirely new economic or political challenges that will demand our attention. But the biggest uncertainty happens in the near term. And in every financial market, that is likely to jack up risk premia, implied vol, credit spreads, and liquidity preference to unaccustomed levels.
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ABOUT NEIL HOWE
Neil Howe is a renowned authority on generations and social change in America. An acclaimed bestselling author and speaker, he is the nation's leading thinker on today's generations—who they are, what motivates them, and how they will shape America's future.
A historian, economist, and demographer, Howe is also a recognized authority on global aging, long-term fiscal policy, and migration. He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.
Howe has written over a dozen books on generations, demographic change, and fiscal policy, many of them with William Strauss. Howe and Strauss' first book, Generations is a history of America told as a sequence of generational biographies. Vice President Al Gore called it "the most stimulating book on American history that I have ever read" and sent a copy to every member of Congress. Newt Gingrich called it "an intellectual tour de force." Of their book, The Fourth Turning, The Boston Globe wrote, "If Howe and Strauss are right, they will take their place among the great American prophets."
Howe and Strauss originally coined the term "Millennial Generation" in 1991, and wrote the pioneering book on this generation, Millennials Rising. His work has been featured frequently in the media, including USA Today, CNN, the New York Times, and CBS' 60 Minutes.
Previously, with Peter G. Peterson, Howe co-authored On Borrowed Time, a pioneering call for budgetary reform and The Graying of the Great Powers with Richard Jackson.
Howe received his B.A. at U.C. Berkeley and later earned graduate degrees in economics and history from Yale University.