An Update on the Economic and Public Health Implications of Coronavirus for Europe

Event Context

• The call was hosted by Goldman Sachs on March 26, 2020, featuring infectious disease experts and internal economists to assess the coronavirus impact on Europe.

Epidemiological Analysis (Prof. Heyman)

• Italy's High Mortality Drivers:
  • Over 20% of Italy's population is over 60 years old, with a high prevalence of comorbidities like diabetes and heart disease.
  • Early hospital systems were overwhelmed, particularly in northern Italy, leading to an inability to provide ventilation and critical care.
• Case Fatality Rate (CFR) Variations:
  • Italy's CFR (~10%) is significantly higher than Germany's (0.55%) and China ex-Hubei (0.88%), driven by Italy testing primarily symptomatic/severe cases rather than community contacts.
  • Countries testing broadly (e.g., Germany, community screening) show lower CFRs because the denominator (total cases) increases significantly.
  • Estimated overall CFR is approximately 1% if hospital capacity remains adequate.
• Regional Comparisons:
  • Switzerland: High infection rates per million but lower mortality due to ample testing of hospital admissions and high availability of ventilators in both civilian and military sectors.
  • China: Low reported cases may result from containment within family clusters in Hubei or insufficient testing in peripheral regions; overseas importation is becoming a new source of cases.
  • Spain: Has an elderly population similar to Italy but experts declined to predict its trajectory as testing efforts are currently ramping up.
• Transmission & Models:
  • China and other nations are attempting to reduce the reproductive number below 1.0; Italy has failed to do so due to a massive superspreading event in northern churches before recognition.
  • South Korea's success is attributed to aggressive contact tracing and testing of contacts, a strategy Italy could not initially replicate.
  • Hypotheses regarding natural immunity (e.g., Nobel laureate Michael Levitt) or mild asymptomatic cases (Oxford models) are noted as unverified estimates.
• Vaccines & Therapeutics:
  • Vaccine Timeline: While Moderna expressed optimism for fall availability for first responders, experts consider late 2021 more realistic for a broadly licensed vaccine due to the need for safety and efficacy trials.
  • Treatment Trials: Clinical trials are underway for chloroquine, antivirals, and plasma from survivors; monoclonal antibodies are also being developed.
  • Administration Constraint: Therapies must be administered early in the infection course to be effective.
• Testing & Immunity:
  • Antibody (serological) tests are being validated; home testing kits are theoretically feasible if tests achieve high specificity and sensitivity.
  • Uncertainty remains regarding the duration of immunity and whether prior infection prevents reinfection.

Economic Forecast (Yari Shten)

• GDP Contraction: Euro area GDP is forecast to contract by 9% in 2020, and the UK by 7.5%, representing a downturn roughly twice as severe as the 2008 financial crisis.
• Primary Growth Drivers:
  • Domestic Demand: Sharp decline due to lockdowns, factory closures, and physical constraints on activity.
  • Foreign Demand: A global recession with a projected 1% contraction in global activity impacts trade-dependent economies like Germany and Italy.
  • Supply Chains: Disruptions in intermediate goods from China and Italy have led to extended supplier delivery times.
• Quarterly Trajectory:
  • Q1 GDP expected to fall 4%; Q2 expected to fall 11% as containment measures peak.
  • A rebound is projected for Q3 and Q4 with an average growth rate of 4%, driven by the relaxation of measures and fiscal/monetary stimulus.
• US vs. Europe: The US is projected to contract less (3.8%) due to stronger pre-crisis momentum, later onset of containment measures, and more decisive fiscal policy.

Policy Response (Silvia Ardagna)

• Monetary Action:
  • ECB: Expanded standard QE, launched a new asset purchase program with flexible criteria, and committed to unlimited adjustment of purchase parameters.
  • Bank of England: Cut policy rate to 10 basis points, initiated asset purchases, and explicitly coordinates with the Treasury to finance fiscal expansion ("whatever it takes" equivalent).
• Fiscal Measures:
  • Direct Support: Euro area countries implemented measures totaling 1.5–2% of GDP; the UK implemented ~3% of GDP.
  • Loan Guarantees: Governments are providing guarantees for corporate loans ranging from 15% to 20% of GDP to support SME liquidity.
  • Specific Examples: Germany allocated ~$50 billion of $70 billion total toward SME work subsidies; the UK launched a job retention scheme and increased NHS spending.
• Policy Gaps:
  • Eurozone fiscal responses are fragmented as the EU relied on relaxing state aid rules rather than issuing direct funds.
  • European measures are smaller than the US package, partly due to existing welfare states but criticized for insufficient coordination.
• Future Institutional Proposals:
  • ESM Reform: Proposals to create an unconditional credit line for governments, bypassing the stigma of current conditional programs.
  • Corona Bonds: A proposal for joint euro-area bonds to finance pandemic spending is under discussion, supported by France, Italy, and Spain but opposed by Germany and the Netherlands.

Equity Market Strategy (Peter Oppenheimer)

• Valuation & Pricing:
  • Markets are pricing in a >20% earnings decline, though the current drop (30-35%) aligns with historical bear market speeds rather than absolute depths.
  • Valuations are near historic lows: Equity risk premium at ~10%, Price-to-Book at the 5th percentile, and EV/Free Cash Flow at the 12th percentile.
• Forward Outlook:
  • Short-term downside remains possible as the market has not yet confirmed a final low.
  • Long-term signals are positive: Historical data suggests a 100% probability of positive returns over a 24-month horizon when starting from current valuation percentiles.
  • Expected 12-month average returns are ~16% and 24-month returns ~40% based on past cycles at similar valuation troughs.