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A coronavirus scenario that everyone wants to avoid

Sam Ro
Managing Editor

The Federal Reserve and Congress have been quick to unlock trillions of dollars of stimulus to bolster the economy as it awaits a favorable turn in the coronavirus crisis.

These moves by policy makers, and their peers around the world, are among the conditions experts say bring us closer to an inflection point in the financial markets, which have taken a historic beating in recent weeks.

However, one condition remains: confidence that the coronavirus outbreak is under control. It’s unclear how we’ll get to that point. In a research note published on Monday, Deutsche Bank analysts led by David Folkerts-Landau assume effective lock-down efforts could see the U.S. economy reopen in May. This is under their base case scenario.

Credit: David Foster/Yahoo Finance

But there’s one scenario everyone wants to avoid: a protracted pandemic.

“[Our] protracted pandemic scenario assumes some lock-downs are terminated prematurely or prove less than fully effective, resulting in a more persistent spread of the virus into mid summer,” the Deutsche Bank analysts wrote. “This forces further, more stringent lock-downs that extend well into the second half of the year.”

[See Also: How coronavirus could permanently change our lives]

What’s particularly troubling about this is that it isn’t exactly a low probability, deep tail, black swan-type scenario.

“The spreading virus and uneven containment raise the risk of a more protracted pandemic, with the virus persisting well into the second half of 2020 before being managed or controlled,” the analysts wrote. “A protracted pandemic would bring non-linear costs: larger output losses, prolonged border closures, permanently disrupted supply chains, the political impact of high unemployment, etc. The massive fiscal rescue packages will have to be paid for eventually.”

Experts warn that the desire to rush a re-opening of the economy is incredibly ill-advised.

Confirmed coronavirus cases are still on the rise. (David Foster/Yahoo Finance)

“With a further spread of the virus and repeated lock-downs, we also see more scarring from this scenario, with growth returning to only slightly positive in Q4 and only slowly normalizes in 2021,” the analysts said. “For the year, the economy contracts 7.8% in 2020 under this profile (-10.9% Q4/ Q4), and the rebound is more subdued in 2021, with activity rising only 2.0% (6.4% Q4/Q4).”

They added that under their protracted pandemic scenario, “equities would be expected to fall further and we would expect a bottom 5% lower than the recent one, so a peak to trough decline of around -40%.”

As bad as all that sounds, it could of course get much worse. And the team at Deutsche Bank are aware.

“One can easily imagine more pessimistic scenarios than we have chosen,” they said.

And so while being conservative near-term would mean extending the lockdown for a couple weeks longer than you might hope, it seems to be a much more attractive alternative than risking the world being in crisis for many more months if not years.