Crisis data is almost always lagging, so investors should focus on the psychology of getting back to normal.
It's all in the handshake. The depth of the crisis, extent of the damage and the pace of the recovery depend more or less on how soon any one of us is prepared to shake hands with a stranger.
That one measure will gauge when we might feel comfortable entering the subway, boarding a plane or booking a table at that quaint cozy bistro down the street. That one measure will determine if the global economy loses more—or less—than the $9 trillion estimated by the International Monetary Fund this year and next. For reference, that's more than the economies of Germany and Japan combined.
IMF Global Forecast for Output
(Real GDP Level, Index)
Source: IMF, World Economic Outlook; And IMF Staff calculations.
The risk of shaking hands was never zero, but how close to zero must it be to return to familiar habits? How close to zero could we get through successful coronavirus containment, better treatment and broader testing? How close to zero might be possible if we could identify those who are already immune or spread out office desks and restaurant tables?
A good read on those questions will drive financial markets far more than any analysis of either current macroeconomic data or even some of the micro trends emerging in the current earnings season. If comfort levels allow activity to return to, say, 90% pre-crisis levels of activity by Christmas, markets could rally substantially given the current liquidity in the system from massive government responses. If we’re closer to 75%, then 2021 will be grim indeed.
We know that the blow has been devastating from the numbers on Chinese port activity, German exports and global air traffic. As for the damage to the United States, the New York Federal Reserve just added to the growing collection of breathtaking charts that show the collapse in real economic activity. It looks like the Grand Canyon's South Rim.
Oh, also, oil prices collapsed even after a deal to cut global production, and the IMF reports that half of its 189 member countries have asked for some kind of a bailout. Banks are taking provisions for loan losses; manufacturers are postponing expansion plans.
The IMF reckons all this will lead to the global economy shrinking 3% this year, compared to its initial 3.3% growth forecast in January. For reference, the world’s GDP fell just 0.1% during the 2008 Global Financial Crisis. For next year, the outlook is a fairly healthy recovery of 5.8%, albeit off a low base and with lots of warning labels about downside risks.
But these numbers probably depend less on the depth of the collapse than on the slope of the recovery. Most economists stress it will be long and hard because the scientific community has yet to come up with clear answers about how the disease spreads or how soon a vaccine may appear.
The World Health Organization has issued a rigorous set of guidelines for relaxing lockdowns, including ensuring health system capabilities to detect and treat every coronavirus case, special protections for hospitals and nursing homes, systems to prevent importation of the disease and public education on new norms that stop the spread.
Then there are the risks around new outbreaks through the winter. A fresh Harvard study cautions the return to work could be much slower given the uncertainties around the immunity of those who actually get the disease and recover and the ability to contain flare-ups until a vaccine is discovered.
"What will drive the difference between the better and worse forecasts is a simple view of how risky we now consider the things we once did without a second thought."
It’s worth a close eye on China, where workers seem to be back on the job but are not yet rushing out to restaurants. Isolated resurgence in Korea so far appears to be relatively easy to track and contain, but new outbreaks will surely fuel jitters.
What will drive the difference between the better and worse forecasts is a simple view of how risky we now consider the things we once did without a second thought.
But it’s not wild optimism to think that a combination of better testing that would identify and isolate carriers, better treatment that would shorten hospital stays and reduce deaths, and broader use of masks, sanitizer and distancing will allow a surprising recovery of activity.
Some of the world's first recorded handshakes date back to Homer's Iliad and are thought to be indications that the hands themselves are friendly and unarmed. In a time of pandemic, an open hand still carries some hint of menace, but even the world of greetings has plenty of alternatives until we get back to normal.