This is a unique event in the history of the world. We have seen worse pandemics, though not since the 1918 influenza pandemic, killer of an estimated 50 to 100 million people worldwide. But we have never seen the kind of sharp and sudden economic contraction around the world that is now under way in response, in part because we have never seen the kind of comprehensive shutdown of economic activity that the world’s governments have imposed to fight the virus.
Nor have we seen, even in the depths of the financial crisis a decade ago, the kind of massive and near-instantaneous release of resources – monetary, fiscal and regulatory – by governments in major economies to lessen the impact of the coronavirus pandemic. Governments, that is, are attempting to contract the economy and expand it at the same time, in each case on a scale never before attempted, based on the sketchiest of forecasts, and all in a matter of days.
So we are, in every sense, in unknown territory.
Start with the pandemic itself. On its own, the effect of the virus, or more particularly fear of the virus, would be paralysis quite unlike anything we have ever seen, as people shrank from each other to avoid contracting it. Now add in the restrictions on public activity, both broad and deep, enacted in the name of “social distancing.” A blizzard can shut down a city for a day or two; an earthquake can devastate a region for longer. But to shut down normal human activity worldwide – hundreds of millions of people on multiple continents are now subject to quarantines of greater or lesser severity, with more to follow as the virus spreads around the globe – for weeks, months, even a year? Unprecedented.
That’s in part, as I say, owing to the virus itself, which is estimated to be more infectious than the 1918 flu and of similar lethality. That it is unlikely to kill anything like as many people is chiefly owing to our greater capacity to fight it, in this age of instantaneous information-sharing and mass communications. Public-health authorities in the past would have had nothing like the same data at their command, from the structure of the virus to its likely targets, nor the ability to inform and mobilize the public to participate in, or at least tolerate, social-distancing campaigns.
But the cost has also been immense. Not only has the supply of goods and services been restricted, whether by the ravages of the disease itself or the self-isolation edicts issued to curb its transmission, but also the demand, via the bans on any activity that involves gathering people in close proximity, from schools to restaurants to public entertainments to mass transportation. Add in the related collapse in the price of oil, and the impact of all this on investor confidence – reflected in the 30-per-cent fall in the S&P 500 since its mid-February peak, the fastest such descent in history – and you have the makings of the steepest drop in output since the Great Depression.
A recent report from JPMorgan Chase summarizes the likely carnage: For the first quarter of this year, the bank forecasts a 41-per-cent decline in real GDP, at an annual rate, in China, where the epidemic began; for the second quarter, declines of 22 per cent, annualized, in Europe and 14 per cent in the United States, after drops of 15 per cent and 4 per cent, respectively, in the first quarter. For comparison: In the worst quarter of the 2009 recession, output in Canada fell at an annualized rate of less than 9 per cent.
To be sure, the bank sees output roaring back in the following quarter – by 57 per cent, annualized, in China, 22 per cent in the euro zone, 8 per cent in the U.S. But that assumes that the pandemic, and the campaign to suppress it, will have eased by then. Is that tenable? China, it is true, succeeded in reducing the number of new cases, from its mid-February peak of more than 4,000 a day, to a relative trickle, in the space of less than a month. South Korea, likewise, went from near zero in mid-February to a peak of 909 new cases a day at the end of February and back to near zero (a growth rate of less than 1 per cent, slower than the rate of recoveries) in the space of a month.
But the number of cases in much of Europe continues to increase at a terrifying rate. If the outbreak in Italy, hardest-hit, proportionately, of any major country, has started to subside – the number of cases there is now growing at 13-14 per cent a day, a third the rate in late February and early March – in Germany, France, Spain and Britain it shows no sign of abating. The U.S., similarly, seems headed for an Italian-style crisis.
Canadians may have been under the illusion the pandemic may somehow brush past us. Both the total number of cases and their rate of growth were comparatively low here through the first weeks of the outbreak. But since about March 10, the case count has been growing faster here than elsewhere – at nearly 30 per cent a day, twice as fast as the average for all countries outside China.
Canada currently has about 10 intensive care beds per 100,000 population. Using the World Health Organization’s estimate that 5 per cent of COVID-19 patients become “critically ill” as a proxy for the numbers requiring intensive care, that means, on the most optimistic assumptions, Canada would need to hold the number of active cases to fewer than 200 per 100,000 to prevent the health-care system from being overwhelmed. Currently, we are at a little over 2. How long would it take to get to 200? At our current rate of growth, less than three weeks. At half that rate, five weeks.
Suppose we succeed, by heroic efforts of self-denial and draconian restrictions on personal freedom, in slowing the virus’s spread to manageable levels. There is no guarantee the epidemic will not pick up again the minute we let down our guard. All it takes, as we have seen, is one “super spreader.” A report for the British government by experts at the Imperial College of London advises intense suppressive measures, including “case isolation, social distancing of the entire population, household quarantines” and school closings, will be necessary until well into 2021, or the arrival of a vaccine, whichever comes first. A report for the U.S. Department of Health and Human Services warns the pandemic “will last 18 months or longer and could include multiple waves of illness.”
This is one of the less advertised implications of the celebrated “flatten the curve” strategy – slowing, through stringent social distancing and other measures, the spread of the virus, in hopes both of holding the peak to less than the hospitals’ capacity and of delaying it long enough for new resources to come on stream. It may mean there are fewer active cases at any one time compared to the do-nothing alternative, but it also means the disease hangs around for longer, and returns again and again. In an uncontrolled epidemic, the dead serve as a natural firebreak, while the vast majority of those who survive acquire immunity, and so also limit further transmission.
We are, rightly, unwilling to contemplate such a ghastly scenario (the Imperial College study puts the numbers of dead in the uncontrolled scenario at more than half a million in Britain, 2.2 million in the U.S.). But the alternative – months or more with schools and businesses closed, borders sealed and the whole population under virtual house arrest – is no less unthinkable. Sooner or later, the public would rebel, but long before that the economy would have collapsed.
The extraordinary public spending plans unveiled across the developed world in recent days, dwarfing even the rescue packages put into effect during the financial crisis – US$1.2-trillion in the U.S., £330-billion (roughly $550-billion) in Britain, $82-billion in Canada, plus the essentially limitless amounts central banks have pledged in liquidity – are not, in any traditional sense, stimulus. They are stopgaps, designed to buy time, douse panic, and support companies and people in need through the coming weeks and months of falling production, soaring unemployment and widespread bankruptcies. No amount of stimulus can conjure more output out of an economy that is in lockdown.
But the longer the shutdown continues, the more unstable the whole edifice becomes. That would be true at the best of times. But the current crisis happens to have arrived at the end of a decade-long, worldwide binge on debt, driven by the ultra-low interest rates that have prevailed, with central banks’ encouragement, since the financial crisis. Across the developed world, total debt – household, non-financial corporate and government – has grown to more than 270 per cent of GDP, according to the Bank for International Settlements. What that would balloon to in a prolonged recession, how many businesses would collapse under the strain, and what that would do to the credit ratings of the rest, is unpleasant to contemplate.
But Canada is even more exposed. Total debt in this country, not counting the financial sector, now exceeds 300 per cent of GDP. Household debt, at about 100 per cent of GDP, is second-highest in the developed world; corporate debt, at 119 per cent, is by far the highest. And while the government sector, at a mere 85 per cent of GDP, looks stronger, that obscures the vast differences in financial health between the federal government and the provinces, and between the stronger provinces and the weaker. As Philip Cross, former chief economist for Statistics Canada, observes in a commentary for the Macdonald Laurier Institute: “High debt levels across households and governments mean Canada is quite vulnerable to a downturn in the global economy … It is easy to imagine how the dominoes might fall.” That was written in January.
So the strategy advanced in some quarters – effectively, of keeping the whole world, and every country in it, in quarantine, their economies immobilized, for months on end – is simply not sustainable. Social distancing, “flattening the curve” and the rest must be regarded, like the monetary and fiscal policies governments are improvising in response, as a stopgap: vitally necessary in the short term, but only to buy time until some more sustainable policy can be substituted in their place.
One element of a more permanent solution would appear to be a huge increase in testing for the virus – a key part, by all accounts, of South Korea’s success. Feeding public-health advocates’ fears of recurring waves of the epidemic, should social distancing be relaxed, is the apparent prevalence of asymptomatic individuals as carriers, who by their nature are hard to detect or avoid. Testing on a mass scale can help to counter that, making it easier to isolate them before they can spread the disease, or trace their contacts after the fact.
That, in turn, can bridge us to the ultimate solution: a vaccine and/or cure. Already drugs are in testing that show promise on both fronts. Every effort, consistent with public safety, should be made to accelerate those tests. Economic measures can’t stop the pandemic, but stopping the pandemic can save the economy.
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