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Morningstar Talks COVID-19 Economic Impact, Vaccines

Our experts share what they see happening now and around the corner.

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Preston Caldwell, equity analyst, and Karen Andersen, healthcare strategist, address two of the biggest questions surrounding the coronavirus today as the world gradually starts to move toward life after the crisis: When and how are we relaxing the restrictions for our day-to-day lives? And when and how will we relax restrictions on the economy? 

Average unemployment reached nearly 15% in April, one of the worst rates since the Great Depression. In this Morningstar webinar, Caldwell takes a step back in time and allows the history of previous recessions to help paint a picture of what the economy could look like in the long term and how much restructuring will be required.  

Quarantine fatigue has also begun to set in, as people grow increasingly ready to return to work, to school, and to their regular lives and previous routines. Throughout this, several drug manufacturers have been researching and working on developing a vaccine. Although lengthy trials, manufacturing issues, and other bumps in the road are inevitable, Anderson says, she also predicts that we could be in the position to supply vaccines in 2021.  

Preston Caldwell: Hey everyone. I lead up our economics research here at Morningstar. And so I'll start us off talking about our near-term economic views pertaining to the period while COVID-19 epidemic is still ongoing. And after that, I'll turn it over to Karen, who will cover all things related to the disease itself, including our forecasts for disease spread and fatalities. And she'll cover what kinds of social distancing measures, including reduced visits to nonessential businesses, will be required to achieve those forecasts. Needless to say, all of her analysis factors in heavily to our economic forecasts. Finally, after Karen is done, I'll wrap up by covering our long-run economic views.

We're forecasting just a 1% negative impact to the long-run level of GDP. That is a fairly small, long-run economic impact compared to what many others have discussed. So this is really the biggest takeaway from an economic point of view of the presentation.

I'll start briefly in covering our short-term views. We're forecasting a 3.9% fall in U.S. GDP growth in 2020 and a 2.4% fall in global GDP growth. That incorporates a 600-basis-point impact from COVID-19 on the U.S., and a 550-basis-point impact on average for the world as a whole. And you can see that impact column, the second column from the left there, showing the impact of COVID-19 on economic growth for 2020.

And the table illustrates how we expect growth to play out for each region. You can see broadly we're expecting a similar impact across each major region, with the eurozone being hit a little bit worse than the U.S. given the greater degree of shutdowns we've seen there. On the flip side, we see Japan and some of the other advanced economies being hit less because they've managed to contain the virus without as much economic damage so far. And our GDP forecast, in terms of our methodology, relies on month-by-month timelines of the disease spread and reduction in visits to nonessential businesses.

And so what we do is we look at industry by industry to see how that's going to affect GDP on an economywide basis. And specifically, we look at the U.S. economy and benchmark that to create our expectations for the rest of the world. And so here what you can see in this chart is a disaggregation of U.S. GDP by industry. And we classify each industry to the extent to which it's fallen within businesses that are exempted from the shutdown orders that we've seen and largely less impacted from social distancing measures. So that's in the left column right there. And that accounts for about 70% of U.S. GDP as a whole. And that leaves about 30% of GDP, which have been impacted by the shutdown orders. But of that 30%, you can see the middle column, about 14% of U.S. GDP worth of industries are able to continue their operations in remote or online form.

And so that means even with widespread implementation of shutdown orders and social distancing, only about 16% of U.S. GDP at the industry level is highly impacted by the shutdown orders and social distancing that we've seen. Now that doesn't mean also that these nonimpacted industries aren't seeing knock-on impact from lower overall economic demand--that's certainly a factor. But the key point of this slide is that the shutdown orders that we've seen and the social distancing are hardly commensurate with a shutdown of the entire U.S. economy.

Our data suggests that for the U.S. overall, visits to nonessential businesses troughed in March at roughly 65% below prepandemic levels. As the shutdown orders are lifted, and we make progress on testing and treatments, we're expecting that nonessential visits rebound to roughly 30% below prepandemic levels by the end of this year. And additionally, there's flexibility for industries to increase their output even when visits don't go up. E-commerce is the most concrete example of that, where we can increase our consumer expenditure without increasing nonessential visits.

Now, when will we see the direct impact of COVID-19 on the economy abate entirely? Most likely that's dependent most on the advent of a vaccine. And we're expecting widespread availability of a vaccine to increase in the first half of 2021, as Karen will talk about more detail. And that should remove any lingering direct impact of the virus on the economy.

Now even once the direct impact of the virus goes away, we'll still have the fallout from reduced consumer and business confidence and consumer and business demand. And key to mitigating that fall in demand will be the fiscal stimulus that we expect to see. We're expecting the U.S. deficit to GDP ratio to increase by roughly 1,200 basis points in 2020. And that's a historically large level of stimulus. In fact, it even outpaces what we saw after the Great Recession as well as the New Deal era. The only thing that comes closest, the World War II ramp up and military expenditure, which lifted the U.S. out of the Great Depression.

Why is fiscal stimulus important? Even in the short run, COVID-19 is both a supply and a demand side shock, so fiscal stimulus will curtail that demand side impact. In the long run, we'd argue that COVID-19 is almost entirely a demand side shock because once the outbreak has been contained, the productive capacity of the economy will largely be unimpaired. To the extent the economy continues to remain depressed, it will be purely because of lackluster demand and fiscal stimulus can help offset that. 

I'll talk about our long-term view more in a few minutes. But for now, I'll turn it over to Karen.

Karen Andersen: Great, thank you, Preston. All right, so starting out with this slide, our May 11 report updated some of our assumptions for the impact of COVID-19 in the U.S., and so I thought I would start here. So for this analysis, our colleague, Debbie Wang, also contributed her diagnostics expertise to help us get a better sense of the tools that we have right now at our disposal to continue to fight the outbreak as we relax the lockdown.

I'll start by giving you a general sense of our expectations and our three scenarios, as well as where we stand today. And then I'll talk in a little more detail on potential treatment and vaccine timetables. Starting where we are today, the table here shows the end of April, there were at least 56,000 COVID-19-related deaths at the end of April. There have been closer to 100,000 as we approach the end of May. Our assumptions for total deaths for 2020 have narrowed significantly. So we see a smaller range of outcomes between our scenarios for remainder of the year.

This is really tied to the fact that following our stay-at-home orders for most of the U.S. beginning in March, we now know what sort of social distancing we're capable of when our healthcare system is at risk of being overwhelmed. And we're also starting to get a sense for our ability to slowly relax this lockdown without seeing a massive spike in new cases. So the variation on our scenarios right now is mostly tied to how we implement the relaxation of the lockdown. So a base case assumes some overshooting, while bear case involves more rapid relaxation of multiple restrictions, and the bull case shows a slow and steady relaxing of measures that wouldn't trigger any increase in cases or any reversals of the relaxed measures.

So on testing, we got to around 250,000 tests a day by the end of April. But capacity is improving. Tests are inching north of 400,000 today, at least they're steadily above 350,000 or so. We think that can continue to improve significantly throughout the end of the year. So our bullish case there might require more innovation in the types of tests that we have, potentially more lab space for testing platforms, or more prioritization of COVID-19 tests over other tests, but the base and the bear cases are closer to the level of testing that we think we're actually capable of today.

So overall, most epidemiologists think we need somewhere between 500,000 and a million tests a day in order to control the pandemic. In our May 11 update, we estimated that the U.S. has access to probably more than 600,000 tests a day. There have been a lot of obstacles standing in the way of meeting that level of testing. Many of these issues are tied to shortages of other supplies like swabs or protective equipment. Those are slowly being worked out, but we also, probably more importantly, lack a centralized IT and logistics system overseeing our testing. And now that would be something that could make sure that tests are tracked and routed to the areas that have the most capacity. So we're making progress to that recommended range. I think it's within the realm of feasibility, but it's going to take time to sort out the logistics.

One of the biggest questions today, and something that ties in with what Preston was talking about, seems to be when and how are we relaxing the restrictions on the economy? And so we've updated our assumptions on nonessential visits. So this is when we'll return to more-normal activity like going to restaurants and gyms and movie theaters and how that's going to evolve over the course of the year. So as Preston mentioned, the nonessential visits did bottom out around 65% below prepandemic levels. By the end of April, this was about 45% below. And so in our base case, we now assume we'll be at about 30% below by the end of the year. We may see a couple of points where this progress reverses slightly if we relax too far too quickly.

And so on this slide, this gives a very rough idea of how this could all evolve. So first, just explaining the graph. It mostly focuses on 2020. The blue section at the end is a condensed version of 2021. The left y-axis shows RT, which is basically the number of people who are infected by any one person with the disease. The orange line, horizontal line, is RT of 1, so that's basically where infection rates would stay steady. Anything below that means that the virus is in the process of being contained. So before lockdown, we were clearly above 1. Without any restrictions on our behavior it was probably closer to 2 or 2.5. Some epidemiologists put that number even higher. Going into early May, we were at a point where transmission was falling til it dipped below 1 in most states, so I plot that here on the blue line. We think that's going to go back above 1 a couple times over the rest of the year.

One reason we think that'll happen is quarantine fatigue. And so this is something that's starting to affect states and starting to affect individual behavior outside of state guidelines right now. And so then we assume a return to better control in July, as we learn to maintain distancing again, maybe with some compromises. So maybe if we took the step to have more in-store shopping, maybe we take a step back and do something more along the lines of curbside pickup instead.

We think that the second reason that there could be higher transmission later this year would be a return to school. It's far from certain that kids are going to be going back to school in the fall across the country. Also far from certain how that would affect infection rates in adults. But based on experience in some countries that have reopened schools, like Denmark, it looks like it does increase the risk of transmission overall, making it easier for us to get that RT back above 1 again.

But by the time we reach the fall, we think we'll have other factors moving in our favor. So availability of diagnostics, that's already improved significantly. The improvement we expect to see this year, it's not ideal, but I think it's going to help on several levels. So first, we're just making sure we can actually diagnose people that have symptoms. That's making sure that they're isolating themselves. And then the next step is to be able to trace contacts of anyone who's diagnosed. So if any of these people test positive, then that's reducing the number of people circulating with the virus. So quarantining these contacts for two weeks stops them from passing it on if an infection does develop.

And then there's another idea of random surveillance. As we start to get more diagnostics capacity, we'll be able to test high-risk populations. We're already testing some nursing homes. We could start testing essential workers, people returning to school and work. You could also do wider testing in areas that are just seeing a higher growth in new cases to try to control outbreaks early. So all this should help prevent further spikes in cases.

We'll also start to see more availability of treatments and vaccines around this point as well, going into 2021 particularly, as we assume there's going to be a vaccine that would reduce transmission to the point where herd immunity would take over. So that would mean that there wouldn't be enough people in the population who were susceptible to the virus to really keep it going.

This is a snapshot of where we are in the U.S., really looking at the past two months, looking at daily diagnosed and daily testing rates. So you can see the gray smaller bars at the bottom--those are diagnoses per day. They increased in March, and they've been volatile but relatively steady, maybe even trending down a little bit, staying in that range, roughly 20,000 to 30,000 new cases a day.

And so this is in an environment of improved testing. So you can see the larger blue bars there. Most recent testing numbers that were updated just at the beginning of this week show, as I mentioned, above 350,000 actually per day. So this combined, flat diagnoses and increased testing actually does imply that we're having falling rates of new cases each day. We're just getting better at finding a high percentage of people who are getting sick.

We also want the positive rate--that's the percentage of tests that come back positive--we want that to be below 10%. Those are the WHO guidelines for sufficient testing. So in May, we have officially moved into this territory as a country. You can see the red line there showing the positive rate and how that's been falling over time. If you extend this graphic out further through May 25, it shows we've gotten as low as a 5% positive rate overall, which is great news. Some states, however, are still lagging.

In the report, we have more details going into the status of each state and talking about some of the red flags we look for, like increasing cases, positive rates above 10%, increasing positive rates, which could either mean they're having more cases or they're not testing as many people--either of those would be concerning. And then also states that look like they're reopening too aggressively, based on combination of those.

We're less concerned with states that are seeing increases in cases if they're also increasing testing and maintaining or shrinking their positive rate. But it's very easy for these stable situations to turn into rapid spread if restrictions are lifted too quickly. So as of our analysis, May 11, we had only 15 states that had no red flags. After looking at some updated stats at the beginning of this week, 12 more appear to have tipped the scales for being ready for reopening. So most states do appear ready for a slow reopening. But there's really a broad range in ways this is being implemented, and populations don't always abide by the current level of recommendation, which is why we do still, in our base case, expect a small, potential smaller, wave in June.

Some particular regions, too, like the Midwest and Northeast--they've seen broad improvements in the past few weeks. But there are some states that have concerning trends really all over the country. So Minnesota and North Dakota, for example, in the Midwest; Louisiana, Arkansas, and Alabama in the South; Arizona in the Southwest. So it's really a patchwork of states that I think are struggling at this point, but it changes every day.

This really highlights where we are now with treatments. The biggest change in treatments since our last update was the Emergency Use Authorization for Gilead's remdesivir. That happened May 1. So remdesivir shortens the duration of the disease and potentially improves mortality rates in hospitalized patients. We expect more data later this month or in early June to help clarify if certain patients do better than others, depending on severity of their disease. Gilead's moderate patient trial is poised to read out shortly.

We did see more details from the NIH study. That's the one that gave us the first control data and was really the basis for that Emergency Use Authorization. That data was published actually just last Friday in The New England Journal of Medicine. So overall, that data appeared to point to a better benefit for patients who are receiving oxygen but less benefit for more-advanced patients who are already on mechanical ventilation. Mortality rates improved for those patients on oxygen. There were really 2% mortality rates for patients on remdesivir and more than 12% for patients on placebo. But those rates, again, weren't statistically significant. We think the data looks solid for remdesivir. But we do think there's clear room for improvement. So either by guiding the drug to the patients who perhaps have been just put on oxygen or by combining the drug with other treatments.

Along those lines, NIH did expand the study of remdesivir to include combination with a drug from Lilly called Olumiant. This is an arthritis drug that could actually help with more of the inflammation-related complications. So as far as other inflammation drugs, we also expect data from Roche's Actemra this month. Sanofi and Regeneron's Kevzara is a drug that's very similar to Actemra. It should have more data in June, but the initial results were disappointing. The trial has been narrowed to the high dose and to the more advanced, very critically ill patients because they failed to see a benefit over placebo in the severely ill patients.

And then there are many other drugs being studied as treatments. A lot of repurposed immunology drugs, even oncology drugs. So generally speaking, these repurposed drugs are going to make up the first wave of potential treatments this year. Because timelines for developing entirely new drugs would be much longer. Remdesivir, technically, it wasn't actually an approved drug, but it was a repurposed drug in the sense that it was already designed to treat Hep C and it had already been tested extensively in Ebola and earlier coronavirus models.

And then the first targeted drugs--those would actually be, very likely to be, antibody therapies. So Regeneron is a company that leads in this space. They're poised to start trials for an antibody cocktail in June. So this could work on a couple of levels--you could take it at a lower dose to prevent infection for short periods of time, perhaps once a month. And then you could also take it at a higher, 10 times higher, dose to treat an infection. We expect some limited availability of this antibody perhaps this fall. But manufacturing should take time, and treatment is probably going to be more expensive as a result.

And so I think beyond the rampant diagnostics availability that we're seeing and Gilead's progress with remdesivir, the biggest news to me is really how quickly the vaccine pipeline is moving forward. The timing of a vaccine being available is very up for debate. There are some experts, Bill Gates, arguing new technologies could allow for rapid approval in months. Others are saying this is going to take years because that's been traditionally true for new vaccines. Overall, I think we've already dramatically shortened some of the steps to market for several of the vaccine candidates.

So one big change is shown here on the slide, comparing more standard practice with what's going on today. One big change is that there's significant funding for expanding manufacturing at risk. So companies don't normally scale at manufacturing until they have positive data from trials. On the development side, clinical trials are also normally sequential. So you normally wait til you have phase 1 data just before you start phase 2. Firms are starting to stack their trials. So the minute they get a positive signal on safety in phase 1, we've seen companies starting to run trials in parallel. Moderna is stacking trials and starting phase 3 in July. They started phase 1 in March. That gives an example of how they're going to have phase 1, phase 2, phase 3 trials, all running in tandem.

And so this outlines, I guess what I would call a "blue sky scenario," showing some of the top vaccine developers and what they could be capable of if everything goes smoothly in their clinical trials. We think companies like Moderna, Pfizer, Astra, and J&J could all, in theory, see Emergency Use Authorization by the end of this year. And five of the six listed here could all receive full FDA approval by 2021, in our view. So things are moving really quickly, and I thought I'd just dive into a little bit of the data we've seen so far. All of this has been since we published this analysis just a couple of weeks ago.

So the initial phase 1 data from Moderna, that was in mid-May, that was really encouraging. It showed it's tolerable, showed neutralizing antibodies developing in these patients that are similar to or even higher than people who have already recovered from COVID-19. So all that implies to me that the vaccine is likely protective. So their timeline for starting phase 3 in July--that does fit with our analysis. One change since we published to this graphic would be related to Astra in their partnership with Oxford. So they announced last week they'd already started a phase 2/3 trial and up to 10,000 volunteers in the UK. They plan to start a phase 3 trial in the U.S. this summer. They plan to have data in August. And the goal is delivery of some vaccine to the U.K. in September. So this could shorten their timeline to be much more similar to Moderna's.

There's another vaccine here, not listed, Novavax. They've entered phase 1/2 in Australia. They're using their flu vaccine technology, and they've also got high capacity to make up to a billion doses next year. So that could be another significant player. They expect to start a phase 2 trial in July and also perhaps could receive an Emergency Use Authorization by the end of the year.

We've seen positive phase 1 data already. The first real published phase 1 data for a vaccine by a Chinese firm, CanSino--that was published in The Lancet. But we haven't put CanSino or another Chinese manufacturer, Sinovac, into this analysis because of lack of data right now in terms of manufacturing capacity. But clearly, that's good news, that we've seen that published in The Lancet. So that could lead to another vaccine down the road.

So, just to summarize, we don't expect all of these vaccines will succeed. There could definitely be some speed bumps along the way with trials, manufacturing issues, but we think that if, just say, two of the six vaccines listed in this table were approved by early 2021, we could be in a position to supply billions of vaccines in 2021. And we do think the approval is going to be on a spectrum. We think the FDA is likely to allow vaccination in healthcare workers and maybe some high-risk populations before the general population of adults, and certainly I would say before children, as we would want to have longer-term safety data for larger populations that are at lower risk from the virus.

But if we are still social distancing, to some extent, and seeing economic headwinds this fall, as I expect we will be, the FDA is likely to lean in favor of earlier use of vaccines once we have the initial safety and efficacy data. And so this is really what would allow us to reach that near normal, nonessential visits by the middle of 2021. 

So with that, I'll turn it back over to Preston to focus on some of the long-term GDP impacts.

Preston Caldwell: Thanks, Karen. So we're seeing some atrociously bad economic data coming in, in the near term. Average unemployment, for example, reached 15% April, the worst rates since the Great Depression. At the same time, investors have seen equity markets rally substantially over the past two months. And I think many now are wondering, "Are markets still grounded in reality? Or are we seeing irrational exuberance?" Answering that question really means answering the question of, "What's going to happen to long-run GDP?" And we argue this is the most important question facing investors right now.

Our philosophy at Morningstar is to value stocks on their long-term cash flows. And if you share that philosophy, then your valuation of a typical stock is vastly more sensitive to the long-run trajectory of GDP than it is to the short-run hit. And that's what this table on this slide in front of you shows. As you move down the table, you show the impact to a typical stock fair value, relative to the change in 2020 and following year GDP. And as you move to the right side of the table, it shows you how the stock fair value varies with respect to the long-run impact to GDP.

As you can see, the values, the hits, the fair value get much worse as you move to the right side of the table, which indicates that the sensitivity is much more to the long-run impact than what happens in the next few years. We're forecasting just a 1% negative impact to the long-run level of GDP for both the U.S. and global. To be clear, this isn't a 1% lower growth rate that occurs year after year; it's a one-time but permanent shift in the level or trajectory of long-run GDP.

And the best way to illustrate that is to look at what happened in the Great Recession, both for the U.S. and for the world as a whole. And that illustrates really a worst-case scenario in terms of the impact of long-run GDP after a recession. Because for the U.S., as you can see on the right chart here, the red line, which was actual U.S. GDP, fell roughly 10% to 15% below its prior, or prerecession, long-run trend following the Great Recession. And the long-run trend is the dotted red line for the U.S. And you can also see gaps for--an even larger gap for the eurozone--as well as a gap for the world as a whole. So overall, the world economy seemed to have a long-run impact on the level of output after the recession.

Now most investors probably are using the Great Recession as a mental model of what's going to happen after this recession. But it's worth noting that many recessions aren't like the Great Recession. Historically, many recessions have seen a much more robust recovery in the long run of the level of GDP. And so that's why when we wanted to answer the question of what is going to be the long-run impact of the COVID-19 recession, we looked to a broader history of the U.S. and global recessions for guidance on a likely range of impact, as well as for the lessons learned in terms of the factors most likely to affect the long-run impact of the recession.

And as you can see, this slide shows the index level of output before and after recessions for all post World War II U.S. recessions. And in the bright red line, you can see the course of the Great Recession, and you can see it was fairly unusual in terms of the long-run impact on GDP. The chart extends out to five years after the recession. And you can see that many recessions seemed to exhibit a V-shaped recovery on that time frame. They basically recovered to the long-run trajectory before the recession.

And a great example for the U.S., of a V-shaped recovery, is what we saw in the 1981-82 recession, when U.S. output fell sharply as a result of a monetary policy contraction. That monetary policy contraction was designed to curb the high rate of inflation that we had throughout the 1970s, persisting in the early '80s. And once the goal of taming inflation had been accomplished, you saw monetary policy shift back into an accommodative mode, and GDP bounced back sharply. And in fact, in that example, in the 1981-82 recession, the long-term impact on GDP of that recession was zero. In fact, actually, the trend rate of growth after the recession was faster than before the recession in terms of real GDP.

And perhaps that has some lessons or some analogies to the recession that we're going through right now, in so far as we're seeing a sharp but short-term curb in the level of economic activity as a result of a external shock to the economy. But the economy itself is fundamentally sound. We didn't have imbalances in the economy or structural weaknesses going into COVID-19. And so once this external cause of recession, which is the virus, abates, we'll be left with the economy we had before the virus, which, in our view, wasn't structurally impaired in any way.

We can also extend this historical analysis to looking at global recessions. And so what this chart shows is results from our study of post World War II global recessions. We looked at roughly 200 recessions occurring across about 50 countries globally for which we had comprehensive data. And the key message is that, again, here at a global level, many recessions don't have a long-run negative impact on the economy. And you can see the 84th percentile line, the bright blue line, ends up at 100% of the prerecession trend and growth by the year five after the recession. And so what that means basically is that at the 84th percentile, which would be 16% of recessions in the sample, you have a full recovery in output compared to the prerecession trends. So no long-run impact on GDP from the recession.

And so that is at the top range of the sample, but that's still a large number of recessions. And in fact, other papers have found as many as 30% or more of recessions have no long-run impact to GDP using a similar methodology as we do but controlling for more variables. And so it's certainly not a foregone conclusion that a COVID-19 recession will have a long-run impact on GDP.

Now because of the wide range of outcomes, we need to look at the specific factors that lead certain recessions to be very bad for long-run growth. In that light, let's look first at the Great Depression, which, really, the key lesson from the Great Depression is that economic catastrophe is created by persistent economic policy error, most of all. And in the Great Depression that took the form, especially, of the commitment to the gold standard. The U.S. and global economies didn't collapse into the Great Depression overnight. Instead, they worsened over a four-year period as central banks responded to a burgeoning financial crisis in the worst way possible, by contracting the supply of money.

And they did so because of this misguided commitment to the gold standard, because if they had expanded the supply of money, it would have jeopardized their ability to maintain the gold standard because there would have been a run on gold reserves of countries participating. That meant that countries could only switch to accommodative monetary policy until they exited the gold standard. And what we saw across major economies was that as soon as the country left the gold standard and switched to accommodative monetary policy, the Great Depression troughed, and we saw a rapid rebound and output. And so the left chart shows, you can see, 1931, the U.K. was the first to leave the gold standard. And they were the first major economy to begin recovering from the Great Depression, and the trough level of GDP was much lower.

And then you can see, the U.S. persisted until 1933 and saw a much worse hit in the economy. But then once they did leave the gold standard, once Roosevelt came into office, there was a sharp rebound in economic output, and France was the laggard, and they saw a more protracted trough and output.

Another key lesson from the Great Depression is that even an economic doomsday, if you will, doesn't roll out a full recovery eventually. I mean, the Great Depression was catastrophic for a decade in terms of GDP. But once policy errors were corrected, and the U.S. and global economies deployed also widespread fiscal stimulus, especially in the U.S. with World War II, we saw a robust recovery out of the Great Depression. And the U.S. even recovered to its pre-Great Depression trend, which is astonishing given that output, real output, fell roughly 30% by the trough in 1933. So this suggests that we can cure the economy of long-run effects from even the worst economic downturn in history, given sufficient policy response.

Let's now turn to the Great Recession, which is fresh in everybody's memory. The first lesson is that it's easier to fix the economy before a financial crisis hits, by far. And really, things got much worse for the U.S. and global economies after Lehman Brothers collapsed in September 2008. And this was after plenty of warning signs--on the housing sector slowing down and financial stress building up in the economy. So it's not something that caught policymakers totally unaware. But once Lehman collapsed, this sparked a financial crisis that arguably transformed a mere housing bust into the Great Recession as we knew it. If policymakers can avoid a financial crisis this time around, dealing with the economic damage of COVID-19 will be much easier.

Another lesson looking at the right chart is that structural issues make it much harder for the economy to recover from a recession. And so looking at the unprecedented ramp up in residential investment as a share of GDP, and then the collapse in the decade following the Great Recession--that was a structural imbalance in the economy that meant that we couldn't just return to the prerecession pattern of economic activity during the recovery. In contrast with COVID-19, the pattern of economic activity before the recession was fairly sound. So we can essentially return to our mode of business before the recession rather than having to go through a protracted restructuring, as we did after the Great Recession.

And finally, as with the Great Depression, policy mistakes were key in making the Great Recession worse, in addition to allowing a financial crisis to occur, we can also point to the turn to austerity away from fiscal stimulus with the U.S. and especially the eurozone pursuing austerity, which arguably constrained the recovery trajectory in the years and the decade following the Great Recession.

We synthesize all of these historical lessons learned into a scorecard to gauge the long-run economic impact of COVID-19, looking across several dimensions. Probably most importantly right now to focus on is the extremely impressive policy response that we've seen so far. Especially the U.S.' historically large fiscal stimulus, as I noted earlier. Also we've seen now the eurozone start to give early signs that leaders are going to commit to fiscal stimulus there, and the political objections by some of the Northern European countries like Germany that have roadblocked stimulus in the past are going to be overcome. And likewise, we think right now that the risk of a financial crisis are fairly small, given the very aggressive action we've seen by central bankers.

Importantly, central bankers are basically unconstrained by the moral hazard quandary, which is the traditional inhibitor to an aggressive response to financial crisis in historical scenarios. Because essentially "moral hazard" means that central bankers are worried about encouraging bad actors whenever they bail out financial institutions during a financial crisis, because they don't want to go into the next economic cycle with lower economic efficiency or more weaknesses in the economy because they've rewarded bad behavior.

But this time around, that argument doesn't really apply because no economic actor is responsible for the distress that they're encountering right now. I mean, the distress is largely the result of an external cause, which nobody had control over, which is the virus. And so we're seeing relatively uninhibited bailouts and liquidity support for financial markets as a result of that. And that's probably the correct thing to do, and it will probably persist going forward and keep the risk of a financial crisis down.

And then finally, underlying structural issues going to the recession pale compared to the economic distortions we saw preceding the Great Recession. In general, the buildup of private debt has been much more modest. We don't see large sectoral imbalances on par with the housing boom prior to the Great Recession. And so there's not a lot of restructuring of the economy that we'll have to do following this recession we're seeing as a result of COVID-19.