Media estimates continue to vary widely with respect to the timing of peak COVID-related health risks globally and on a country-by-country basis in light of ongoing daily fluctuations in case loads and policy response. To model these dynamics with respect to each country’s prior health risk history, we use our past-projected Health Risk data from 31 December 2020 as a counterfactual baseline of country-specific risk trends that we would have observed in the absence of COVID. We then compared these risk trends to our current forecasts to derive country-specific estimates of (1) when health risk will peak relative to each country’s own counterfactual baseline, and (2) when health risk levels implied by our current forecast will “return to baseline,” corresponding to a convergence of our current and past-projected risk trends.
The figure below reports these two data points for countries currently experiencing substantial COVID-related health risks. Red dots represent our current forecast of the date of peak risk; blue dots represent our current forecast of the date of return to baseline risk (n.b.: Countries for which risk is not expected to return to baseline by year-end 2020 are assigned to the last date of the year). The second figure below reports this information explicitly as the number of days until each country hits peak risk (with negative days indicating cases where this has already occurred), and the number of days until the subsequent return to baseline.
As visible in the figures, our data suggests that the worst has passed for most countries in Asia that were first hit by the outbreak, including China. That said, with respect to China — whose efforts to stamp out the crisis at the expense of rising social polarization and civil liberties concerns have been increasingly lauded globally — our data currently supports the somewhat counter-consensus take that China in fact faces a long tail — 151 days — until a return to baseline risk levels.
By contrast, while the U.S. and several European countries currently facing large-scale public health crises — most notably Italy and Spain — have not yet hit peak risk, they will face a much quicker return to baseline risk running 46-53 days, roughly one-third of the time period for China. The timeline is substantially bleaker for several major emerging markets — most notably India and Indonesia — who remain a long ways off from peak risk (88 and 172 days, respectively) and continue to face substantial public health challenges in managing the crisis amidst a rapidly accelerating case count and limited state capacity; both countries remain substantially farther from a return to baseline risk (unlikely to occur within 2020). Other major EMs in the sample — including the Philippines and Thailand — are expected to face similarly long timeframes for a return to baseline risk, but with risk forecast to peak within the next month.
These forecasts, while derived directly from our health risk data, are subject to the caveat that they are made amidst a rapidly changing public health situation; nor are we epidemiologists. We therefore highlight the potential for shifting forecasts in the week to come as new information surrounding the pandemic continues to become available and countries’ policy responses continue to shift accordingly.
See below for a global take on these dynamics and implications for global macro risk.
Global Health/Macro Forecast | Health Risk Set to Peak in Early May; Macro Risk to Accelerate Sharply Thereafter
Per the figure below, which plots a GDP-weighted global average of our Health Risk indicator over 1H/2020, our data continues to point toward the first/second week of April as “peak risk” period for COVID-related health pressures globally (for a reference point, see middle line in figure indicating today’s date). Following that peak, our data currently anticipates a relatively sharp decline in global Health Risk heading into 5 May, which marks the date when our global average Health Risk indicator is currently forecast to return to pre-outbreak levels, defined as prevailing risks levels as of 31 December 2019 when the outbreak first became widely known following the closure of the Huanan Wholesale Seafood Market.
Per the second figure below, which plots a GDP-weighted global average of our Macro-Economic Policy Risk indicator through year-end/2020, we nevertheless forecast a challenging macro policy climate from May 2020 onward (and nearly to the day when Health Risk plateaus). While recent global central bank monetary/fiscal policy loosening has driven global Macro Policy risk lower on average, our data points toward a bottoming out of those trends in early May, followed by a renewed ascent beginning in early June and lasting through at least year-end 2020.
As we have highlighted previously, the trend continues to suggest that macro efforts to date will be insufficient to prevent broader economic fallout once the direct health implications of the pandemic begin to subside. We therefore advise renewed attention to macro risks over the longer-term despite rebounds into positive territory in U.S. and other equity markets earlier this week.
EU | Conflict Over “Federalizing” COVID-19 Spending Captured by Contingent Health Risks
European Union leaders face conflict over financing the cost of dealing with COVID-19. Italy, supported by France and Spain, is calling for an EU-backed credit instrument to finance the fiscal pain associated with quarantining their economies to slay the coronavirus. Opponents, led by Germany, have consistently opposed any such shift in the past but may find it difficult to stave off this precedent-setting policy change given the magnitude of the costs of state-enforced constraints on economic activity. The figure below presents Contingent Health Risk for Germany relative to EU members in the GeoQuant data system. These bilateral risks did not start rising until 3 March but have now eclipsed previous highs in the system with German-Italian Contingent Health Risk highest, but closely followed by France and Spain. Germany has been successful at fending off structural change that would centralize how EU-member states finance themselves even as it has pushed political and economic centralization more broadly. With member state economies facing huge short-term financing needs, Germany and its remaining allies will find it difficult, but will likely thwart a precedent-setting EU bond. However, Italy’s government, challenged by anti-EU nationalist Mattei Salvini’s Lega Party, will press aggressively for the policy change if only to demonstrate its independence vis-a-vis the EU.
Market Movements | Spotlight on Political Risks / S&P 500
Our data indicates that U.S. political risks will continue to exacerbate recent COVD-19-driven turmoil in the U.S. economy and related volatility in equity markets, despite the recent $2.2 trillion rescue package tabled by Congress.
Indeed, while U.S. Macro-Economic Policy Risk has been trending down into the crisis — with central bank actions and fiscal stimulus helping buffet markets in the short-term — a broader range of Governance and Social Risks relevant to the COVID-19 health shock are elevated and/or increasing in the near future. This includes Health Risk, State Capacity Risk, and Social Polarization Risk, all of which are critical to the U.S. response to COVID-19 and all of which are now strongly and negatively correlated with the S&P 500 for 2020/YTD (r=-0.97, r = -0.87, and r = -0.93 respectively). The figure below reports day-on-day correlations between the full gamut of our daily U.S. political risk indicators and the S&P 500 for 2020/YTD.
Note that with the exception of Micro-Economic Policy Risk, nearly all of these indicators actually have positive or weak negative correlations with the S&P 500 since 2013, highlighting both the general agnosticism of U.S. equity markets to U.S. political risks over this period, as well as the apparent sensitivity of these markets to politics this year. Moreover, even the “bright side” of declining Macro-Economic Policy Risk — which maintains a positive correlation with the S&P 500 in 2020 — is forecast to inflect into a rising risk path from May onwards. In addition, and per our previous analysis, we expect elevated Institutional Risks in the U.S. will impede the transmission of the federal government’s new support efforts into stemming COVID-19’s social and economic impacts.
The figure below provides our 50-country forecast of top-line Political Risk for the month ahead (today through 24 April). Red (green) bubbles indicate increasing (decreasing risk). Full trend lines available on the app. Custom insights available for clients.
Forward-looking updates from GeoQuant’s high-frequency political risk intelligence platform.
*Originally distributed 3.27.20