Risks to economic re-opening

Speed and efficacy of vaccine roll-out will determine global recovery

29 January 2021 Janet Henry, Global Chief Economist

    Vaccine breakthroughs mean life should start becoming more normal again during 2021, allowing global GDP growth to improve. But near-term growth risks are escalated by increasing coronavirus cases, new variants of the virus, tighter social-distancing restrictions, and delays in vaccine roll-outs.

    Israel and UAE are the vaccination pace-setters on roll-outs, while among the advanced economies the UK and US are leading the way. More vaccines will soon be approved in more countries and more inoculation programmes will start but there are many concerns. One is that some of the new, more-virulent strains may have some immunity to the existing vaccines.

    Another relates to the number of doses secured by different countries. While some advanced economies have ordered enough doses to inoculate their residents several times over, many emerging economies will have to rely on the World Health Organization's COVAX partnership – and that aims to cover only 20 per cent of populations this year.

    There are also variations in populations' willingness to be vaccinated and opposing views on vaccination strategies. That will affect the speed and scale at which governments allow economies to re-open domestically and to international travel: until the pandemic is contained everywhere it is not completely contained anywhere.

    The rise in cases has already caused renewed restrictions and slower growth globally at the start of 2021, particularly in Europe where several countries appear to have gone back into recession, albeit less severely than in the first wave in the second quarter of 2020. Even in much of Asia outside India, momentum seems to be slowing.

    Weaker growth means policy can stay loose but already-low interest rates leave little scope for further falls. Tougher social-distancing restrictions in advanced economies will likely also mean more government support in many countries, burdening public finances further but preventing a sharp rise in layoffs and bankruptcies and thus limiting the permanent hit to potential growth.

    So the bounce-back in pent-up demand, even if delayed, should still be fairly robust – though much hinges on the pace and breadth of re-opening, and that depends on whether there are further coronavirus waves and further lockdowns.

    We still expect global growth to recover but from a weaker starting point and for some countries, the road back to a pre-pandemic level of GDP will be long. In China, activity has already fully recovered. But in emerging countries where cases are high and vaccine-orders low, the scope for state stimulus is limited: Argentina and South Africa had deep recessions last year and GDP is not expected to return to pre-pandemic levels until after 2023.

    There will also be divergences among the advanced economies. As a major capital goods exporter Germany had a shallower recession in 2020 and will benefit from a recovery in China's manufacturing investment. So it should be quicker to recover than countries like France and Spain that rely more on consumer spending and services.

    The Eurozone contracted more than the US in 2020 so can now grow faster, but we don't expect GDP to return to end-2019 levels until end-2022 while the US should be there by this December – even sooner if the new Biden administration pushes through just half its planned USD1.9 trillion fiscal package before April.

    In those economies that can roll out the vaccine quickly and are able to ease restrictions, there should be little or no additional economic scarring. However, if vaccine problems or new virus strains extend lockdowns, the lasting economic damage in terms of insolvencies, unemployment, investment and productivity, will be much bigger.

    First published 21 January 2021.

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