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A lot has changed over the Christmas period, and the end of pandemic appears closer, but the road has got bumpier. In the three weeks since the previous article,[1] more countries have begun to administer multiple, highly effective COVID-19 vaccines. And the UK’s transitional arrangements that had been in place since it formally left the EU have come to an end with a trade deal agreed, meaning that tariff- and quota-free trade will continue, in goods at least. Both these developments have been as we expected. More worryingly, two new ‘variants of concern’ (VOCs) of the virus that causes COVID-19 have been discovered – B.1.1.7 in the UK and 501Y.V2 in South Africa. Both are thought to be 50% – 70% more transmissible. New cases are drifting higher in Europe, driven by developments in the UK, and are rising in sub-Saharan Africa too.
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On Wednesday the UK effectively entered a nationwide lockdown, with restrictions similar to those imposed last Spring and more severe than in the run-up to Christmas. With the reproductive rate of the virus thought to have been in the range 0.8-0.9 during the November lockdown, when the earlier strains were dominant, and with the additional closure of schools and universities thought to reduce ‘R’ by around 0.2, we cannot be certain that the new restrictions will be sufficient to contain the virus. However, fear is likely to play a part, leading to increased compliance with the rules, so we expect cases will begin to fall within a few weeks.
Faced with an unexpectedly rapid growth in cases, the UK government has decided to prioritise giving as many people as possible their first vaccination in a two-dose schedule, allowing an interval of up to 12 weeks before the second dose. This runs counter to the manufacturers’ guidelines of three weeks (in the case of the Pfizer/BioNTech vaccine) or four (in the case of the Oxford/AstraZeneca vaccine). This controversial move has been roundly condemned by other nations who are sticking to the guidelines, because we have no evidence on the efficacy of the Pfizer/BioNTech vaccine and very little on the Oxford/AstraZeneca vaccine if the second dose is delayed. However, in the present circumstances we cannot make decisions on the basis of near certainty, as those in the medical sciences strive to do.
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What will be the economic impact of the new virus strains? The lockdowns in place across much of Europe before Christmas appear to have had a much smaller impact on activity than the initial lockdowns last Spring, with the fall in ‘time spent in the workplace’ around a quarter of that seen previously, according to Google mobility data used as a real-time proxy for economic activity. Unfortunately, these data are of little value when it comes to assessing the impact of the renewed UK lockdown. ‘Time spent in the workplace’ fell on Monday 21 December in many countries, and has remained low up until Tuesday 29 December, which is when the data end. But as these data are not seasonally adjusted, that sharp reduction almost certainly reflects the impact of the Christmas holidays.
As a result, up until late December, it was hard to discern any impact from the renewed lockdowns on global economic activity, as proxied by time spent in the workplace. Previously, it was reasonable to project that global GDP would be broadly flat through 2020 Q4 and 2021 Q1, before rebounding sharply from Q2. A marked contraction in UK GDP in the first quarter of this year now seems inevitable. Smaller contractions may be seen in other countries, though that will depend on the extent to which they are able to prevent the new VOCs taking hold.
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Medical opinion appears to expect existing vaccines to remain extremely effective against the B.1.1.7 strain now spreading rapidly across the UK. Some commentators are concerned that existing vaccines may be less effective against the VOC originating in South Africa, though there is confidence that existing vaccines can be modified within weeks if necessary. However, so long as fiscal support packages keep pace with tougher lockdowns, then our expectation of a strong rebound in global economic activity, once the most vulnerable have been vaccinated, remains in place. Indeed, after an even longer period of reduced economic activity, and with even higher savings balances, the pace of the turnaround, and the associated risk of a sharp inflation pick-up, may be even greater than had been imagined back in November.
[1] https://lipperalpha.refinitiv.com/2020/12/news-in-charts-vaccines-cant-come-soon-enough/
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