Fra Unicredit
Last Sunday, I suggested – via a chart showing the total number of cases in China vs the rest of the world (lagged by 28 days) – that we may be about a month away from seeing the peak in the European and US epidemic curves. After another week, this “mirroring” of the Chinese experience remains on track, with the rest of Europe and the US following Italy by about one week.
On the one hand, the good news is that Europe may benefit from what we have learned about the effectiveness of containment in China and from the fact that the European healthcare systems are among the best in the world. According to the WHO’s 2020 index, France has the world’s best healthcare system, including for preventive care, followed by Italy in second place. Spain is number 7, UK number 18 and Germany number 25, to mention a few. The US is number 37.
Of course, these are broader indices than what might be relevant for specific virus-related issues, but the general picture, including the risk of the virus “crowding out” other important healthcare needs and treatments, is probably still broadly right. The WHO definitions and rankings are here: Best Healthcare In The World 2020.
On the other hand, the more draconian the measures to contain the spreading of the virus, the greater the (short term) economic shock will be. In other words, referring back to my three scenarios in last Sunday’s Wrap, I now think the probability of the most benign scenario is very low, and that the odds may be moving from the second (central) scenario I discussed towards the third “worst case” scenario, i.e. with significant negative economic effects in Q2, and some spill-over into Q3.
While the debate about the relative importance of supply vs. demand shock continues, and hence on the effectiveness of policy stimulus, there can no disagreement that markets are now reacting in a way that will impose additional pain on the real economy. Therefore, central banks need to (and will!) put in place measures to limit the disruption of markets so as to preserve as much as possible the critically important transmission mechanism from the central bank to the real economy.
The bigger the role of the banking system in the transmission of credit, the more important this is – hence, the need for the ECB to act. And governments need to (and will!) step in with fiscal measures to provide a cushion at least for those directly impacted by the virus and the containment measures.
