Consistent with our contrarian March forecast, Australia appears to have passed through its peak in new infection cases, and successfully flattened its curve, which is no mean feat (see the first screenshot from our real-time tracking systems). And the US infection data is likewise tracing to an April zenith in line with our previous projections (see third screenshot).
We built this forecasting framework (see the full technical paper here) because we hypothesised that markets would respond positively to passing through the peak in new infection numbers, which appears to have played out over recent trading sessions. This is one of two critical regime changes that we outlined as key for markets. The second is when governments start preparing to reactivate the working age population, which will be crucial for avoiding a protracted depression that could inflict greater human costs on the community than the first-order impacts of the virus itself.
Since we posited that a six month hibernation of businesses was likely to be highly sub-optimal from a social, human and economic perspective, there has been a sharp pivot in the public debate with numerous leaders calling on the government to consider a more nuanced and adaptable containment strategy.
We proposed a shorter 1-2 month lockdown followed by a two-stream strategy that involved (1) allowing the low risk sub-50 year old working-age population to get back to making a living while (2) continuing to protect and quarantine the much higher risk +65 years cohort. The Australian newspaper’s former editor in chief, Chris Mitchell, summarises the change in the zeitgeist well here.
In view of the fact Australia looks to be now flattening its curve, I expect the Prime Minister Scott Morrison and Treasurer Josh Frydenberg to adjust their focus squarely on to the profound human and economic costs of putting Australia into an economic depression the likes of which has not been seen since 1929.
There was value initially shocking the community into submission with the “six month hibernation” narrative to ensure Australians started adhering by bona fide social distancing principles, which some were clearly struggling to do.
The PM and Treasurer now need to evolve their rhetoric to a “six to twelve month battle against the virus” while avoiding a depression and protecting the 10 per cent of Australians to whom the virus poses real risks.
This should permit the 90 per cent of low-risk members of the community to gradually transition back to making a living at some point over the next three to six weeks so long as they continue to abide by prudent transmission-mitigating behaviours. Full normalisation will not be able to occur until we get effective anti-viral drugs and/or a vaccine.