By Christophe Blot and Paul Hubert

The Covid-19 crisis
will inevitably plunge the global economy into recession in 2020. The first
available indicators – an increase in the unemployment rolls and in partial
unemployment – already reveal an unprecedented collapse
in activity. In France, the OFCE’s assessment
suggests a 32% cut in GDP during the lockdown. This fall is due mainly to stopping
non-essential activities and to lower consumption. The shock could, however, be
amplified by other factors (including rises in some sovereign rates, falling oil
prices, and capital and foreign exchange movements) and in particular by the
financial panic that has spread to the world’s stock exchanges since the end of
February.

Since 24 February
2020, the first precipitous one-day fall, the main stock indexes have begun a
decline that accentuated markedly in the weeks of March 9 and 16, despite
announcements from the Federal Reserve
and then the European Central Bank (Figure 1). As of 25 April, France’s CAC-40 index had
fallen by 28% (with a low of -38% in mid-March), -25% for the German index and nearly
-27% for the European Eurostoxx index. This stock market crash could revive
fears of a new financial crisis, only a few years after the subprime crisis. The
fall in the CAC-40 in the first few weeks was in fact steeper than that
observed in the months following the collapse of Lehman Brothers in September
2008 (Figure 2).

While the short-term impact
of the Covid-19 crisis could prove to be more severe than that of the 2008
financial crisis, the origin of the crisis is very different – hence the need
to reconsider the impact of the stock market panic. In the financial crisis,
the origin was in fact a banking crisis, fuelled by a specific segment of the
US real estate market, the subprime market. This financial crisis then caused a
drop-off in demand and a recession through a variety of channels: higher risk
premiums, credit rationing, financial and real estate wealth effects,
uncertainty, and so on. While some of these elements can be found today, they
are now being interpreted as the consequence of a health crisis. But if there
is no doubt that this is at the outset a health and economic crisis, can it
trigger a stock market crash?

Another way of posing
the question is to ask ourselves whether the current stock market fall is due entirely
to the economic crisis. Share prices are in fact supposed to reflect future changes
in a company’s profits. Therefore, expectations of a recession, as demand –
consumption and investment – and supply are constrained, must result in a reduction
in turnover and future profits, and therefore a fall in share prices.

However, the financial
shock could be magnified if the fall in stock prices is greater than that
caused by the decline in corporate profits. This is a thorny issue, but it is
possible to make an assessment of a possible over-adjustment of the stock
market, and thus of a possible financial amplification of the crisis. The
method we have used is to compare changes in profit expectations (by financial
analysts) since the beginning of the Covid-19 crisis with the fall in equities.
Focusing on CAC-40 companies, profit expectations for next year have been cut in
the last three months by 13.4% [1]. This reduction should therefore be fully
reflected in the change in the index. In fact, the fall there was much larger:
-28%. This would result in an amplification of the financial shock by just
under 15 percentage points.

This over-adjustment by
the stock market can be explained by, among other things, the current
prevailing uncertainty about the way lockdowns around the world will be eased, and
thus about an economic recovery, as well as uncertainty about the oil shock that
is unfolding concomitantly, with determinants that are both economic and
geopolitical. This over-adjustment may therefore not be wholly irrational (with
regard to the supposed efficiency of financial markets), but the fact remains
that it has led to major variations in the financial assets of consumers and
business.

Variations like these
are not neutral for economic growth. On the consumer side, they contribute to
what are called the wealth effects on consumption: additions to a household’s assets
give it a sense of wealth that drives it to increase its consumption [2]. This effect is all the greater in countries where
household assets are in the main financialized. If a large portion of household
wealth is made up of equities, then changes in share prices strongly influence
this wealth effect. The portion of shares (or of investment funds) in financial
assets is quite similar in France and the United States, respectively 27% and
29%. However, these assets account for a much larger share of the disposable
income of American households: 156%, compared to 99.5% in France. As a result,
French households are less exposed to changes in share prices. Empirical studies
generally suggest a greater wealth effect in the United States than in France [3].

As for business,
these changes in stock market valuations have an effect on investment decisions
through collateral constraints. When a company takes on debt to finance an
investment project, the bank demands assets as collateral. These assets can be
either physical or financial. In the event of an increase in equity markets, a
company’s financial assets increase in value and allow it greater access to credit
[4]. This mechanism is potentially important today. At
a time when companies have very large cash requirements to cope with the brutal
shutdown of the economy, the sharp decline in their financial assets is restricting
their access to lines of credit. While the financial amplification factors are
not reducible to the financial shock, the recent changes in the prices of these
assets are nevertheless giving an initial indication of how the financial
system is responding to the ongoing health and economic crises.

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[1] The data comes from Eikon Datastream, which for each
company provides analysts’ consensus on the earnings per share (EPS) for the
coming year and the following year. We then calculated the weighted average using
the weight of each CAC-40 company in the index of the change in these
expectations over the past three months. The fact that a 13.4% decline in
profit expectations for the next year will give rise to a 13.4% decline in the
stock price is made on the assumption that profits beyond the next year are not
taken into account, or, in other words, that their current net value is zero,
which is to say that investors’ preference for the present is very strong
today.

[2] More formally, we can speak of a propensity to
consume that increases as wealth increases. Wealth effects can be
distinguishable according to whether they are purely financial assets or also
include property assets.

[3] See Antonin, Plane and Sampognaro (2017) for a summary of these estimates.

[4] See Ehrmann and Fratzscher (2004) and Chaney, Sraer and Thesmar (2012) for empirical assessments of this transmission channel
via share prices or property prices, respectively.

By Gregory Verdugo

Covid-19 has made it
risky to have a job that cannot be done remotely and requires contact with the
public. Given the danger of infection facing frontline workers, employers confront
the risk of legal consequences in the event of insufficient protection. This
new risk could lead to changes in the characteristics of the workers being hired,
as the threat of lawsuits creates an incentive to discriminate by choosing
workers who are least at risk for these positions. As long as the Covid-19
virus is in circulation, we could therefore witness the rise of a powerful new
source of discrimination in the labour market based on the risk of serious
infection. But according to some epidemiologists, the virus could be circulating
and creating episodic outbreaks for 18 to 24 months [1], with the result that Covid-19 could leave a lasting
imprint on the job market.

Which workers are
least at risk? First, there are those with no apparent co-morbidities, which means
that individuals who are obese may face even more pronounced discrimination on
the labour market [2]. However, the main easily identifiable group at lower
risk are the young, since the under-30s face a very low risk of developing a
serious form of Covid-19 [3]. This situation is unprecedented – for the first
time, we’re experiencing a recession where young people are less affected than
more senior employees!

But while the young are
less at risk, there is one group of individuals for whom the risk could be even
lower. Experience with other viruses suggests that individuals who have
previously contracted Covid-19 gain at least temporary immunity from future
infection [4]. Although such immunity remains uncertain and
controversial [5], some employers may want to test their employees,
especially those in at-risk positions, to rule out the danger of infection
attributable to their professional activity.

Information on the
state of an employee’s immunity could therefore be very valuable for an
employer – so much so, in fact, that it could lead to the development of
low-quality private tests and a risk that false immunity certificates could
proliferate. To avoid these risks, many countries are considering creating
immunity passports certifying that a worker has already contracted Covid-19 and
is, at least in the short term, safe from the risk of infection [6]. Chile has announced that it is implementing such
a policy, and it is under discussion in various European countries.

An immunity passport
is expected to provide high wages in labour markets wracked by Covid-19,
particularly in high-risk jobs, including those requiring close contact with
infected people, such as in hospitals. In turn, in an economy in crisis, an
immunity passport guaranteeing well-paid employment could generate high demand for
voluntary infection among those in direst need.

This
possibility of self-infection when immunity is socially valued or economically
profitable is not merely a theoretical question. In an article published in
2019, historian Kathryn Olivarius of Stanford University showed that there are
numerous historical precedents [7]. Being recognized as having
immunity was in particular an essential condition for economic integration
during the colonization of tropical zones, where infectious diseases were decimating
the colonists. In the early 19th century, immigrants recently arriving in New
Orleans were said to be “non-acclimated”, and sought to quickly suffer and
survive yellow fever, which at that time had an estimated mortality rate of
about 50%, which is well above that of Covid-19, currently estimated at between
0.3% and 1%. To integrate, you had to prove that you survived the infection and
thus became “acclimated”. Only after becoming “acclimated”,
with the risk of early death being ruled out, did it become possible to have access
to the best jobs in the local labor market, to get married and to access credit
from local banks.

If a Covid-19
immunity passport is developed, it will in a similar manner foster a dangerous
temptation to become infected in order to gain access to jobs where the risk of
infection is high but wages are also high. The temptation to self-infect would
be even stronger in the case of Covid-19, the consequences of infection are usually
benign. But voluntary infection could lead to risky behaviour: one can imagine
individuals trying to get infected, and in doing so spreading the disease
around them, especially if they remain asymptomatic.

Alex Tabarok, a professor
of economics at George Mason University, argues that the issue of immunity
passports by the public authorities would also imply the need to regulate the demand
for voluntary infection that this would give rise to. So the public authorities
should offer the possibility of infection in moderate doses, in a medical
setting and by ensuring medical follow-up during a period of quarantine
following voluntary infection.[8]

The supervision of a
voluntary infection motivated by the desire to obtain an immunity passport clearly
poses ethical problems. First, it would be individuals in the most precarious
situations, especially those most affected by the recession, who would volunteer.
Furthermore, it is not certain that medical supervision reduces the risk of
death or serious sequelae. Above all, voluntary infection contradicts the apparent
policy goal today, which is to curb the epidemic as much as possible, as the
possibility of achieving collective immunity seems distant. So such an approach
is for the moment dangerous.

To be consistent with
the goal of suppressing the epidemic, it therefore appears necessary to discard
the policy of immunity passports, which give value to having been infected. As is
set out in the French protocol for lifting the lockdown [9], it is also necessary to ensure that the private
market does not fuel this demand and that companies don’t create their own
immunity passports or try to acquire information about immunity through other
means. While a rule like this might seem paradoxical, the risk of
self-infection can be eliminated only if a non-discrimination rule is imposed that
prohibits employers from using or requesting the results of serological tests
to employ workers in high-risk positions and that also bars employees from
revealing their immunity status.

---

[1] Moore Kristine, Marc Lipsitch, John M. Barry and Michael
T. Osterholm, 2020, “The Future of the COVID-19 Pandemic: Lessons Learned from
Pandemic Influenza”, COVID-19: The CIDRAP Viewpoint,
April. https://www.cidrap.umn.edu/sites/default/files/public/downloads/cidrap-covid19-viewpoint-part1.pdf

[2] Greve J., 2008, “Obesity and labor market outcomes
in Denmark”, Economics & Human Biology, 6(3), 350-362. https://doi.org/10.1016/j.ehb.2008.09.001

[3] Verity Robert et al., 2020, “Estimates
of the severity of coronavirus disease 2019: a model-based analysis”, The Lancet infectious diseases. https://doi.org/10.1016/S1473-3099(20)30243-7

[4] Altman Daniel M., Daniel C. Douek and Rosemary J.
Boyton, 2020, “What policy makers need to know about COVID-19 protective
immunity”, The Lancet. https://doi.org/10.1016/S0140-6736(20)30985-5

[5] See the opinion of 24 April 2020 by the World
Health Organisation, “Immunity passports in the
context of COVID-19”, https://apps.who.int/iris/bitstream/handle/10665/331866/WHO-2019-nCoV-Sci_Brief-Immunity_passport-2020.1-eng.pdf

[6]  The Guardian, 2020, “‘Immunity
passports’ could speed up return to work after Covid-19”, 30 March. https://www.theguardian.com/world/2020/mar/30/immunity-passports-could-speed-up-return-to-work-after-covid-19

[7] Olivarius K., 2019, “Immunity, Capital, and Power
in Antebellum New Orleans”, The American Historical Review,
124(2), 425-455. https://doi.org/10.1093/ahr/rhz176

[8] Tabarrok A., 2020, “Immunity Passes Must Be Combined With Variolation”, Marginal Revolution, blog post, 5 April, https://marginalrevolution.com/marginalrevolution/2020/04/immunity-certificates-must-be-combined-with-variolation.html

[9]https://travail-emploi.gouv.fr/IMG/pdf/protocole-national-de-deconfinement.pdf