News in Charts: A stocktake on the global recovery

As we enter the second half of the year, here is a stocktake on the state of the virus and the path of the global recovery.

The worst of the spike in COVID-19 cases in Asia appears to be over. The new and more transmissible delta variant of the virus which was first reported in India had spread rapidly. Case numbers in Asia have since fallen, which, given low vaccination rates, is likely to be due to non-pharmaceutical interventions such as lockdowns and voluntary social distancing, offering the virus fewer susceptible hosts. However, the variant is now spreading more widely round the globe, with the World Health Organisation tracking cases in 96 countries.

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The delta variant caused a spike of new cases in early May in several hotspots in England. The number of new cases in Bolton and Blackburn was comparable to the second wave of infections in January this year. However, the number of deaths didn’t rise anywhere near to the same levels. This can be largely attributed to the fast rollout of COVID-19 vaccines, which have proven to be highly effective. The UK has provided around two-thirds of its population with at least one dose of a vaccine, and around a half have received two doses. At current vaccination rates, Fathom expects most major economies to have offered at least one dose of a COVID-19 vaccine to all adults by the end of the year. Anti-vaccine sentiment remains a problem in some countries, however, with survey data suggesting that only 72% of Americans and 71% of the French are willing to be vaccinated.

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As of 2021 Q1, world GDP has returned to its pre-crisis level — largely thanks to strong growth in China. Across the board, however, only 22 per cent of countries have fully recovered to pre-crisis levels of output. The US is within a whisker of reaching this mark, after easing restrictions. During the worst of the pandemic households accrued vast savings. How quickly those savings are spent is likely to be key in determining the future path of output for those countries that are yet to fully recover.

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In Fathom’s view, a large proportion of those savings is likely to be spent as restrictions ease. Survey evidence from the Bank of England and New York Fed supports this view, suggesting that around a quarter of savings in the UK and US may be spent. Timely monthly indicators, such as retail sales related to activities restricted during lockdown, vehicle sales and the number of domestic airline passengers, have already risen sharply as confidence has returned to normal levels. However, other sectors are yet to show signs of recovery. International travel restrictions remain in place, impacting the level of bookings for tourism destinations. As the vaccine rollout continues and countries establish cross-border travel agreements, Fathom expects a further boost in economic confidence and global output.

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Overall, as expected the global ‘V’ shaped recovery is complete. But what will happen next as economies continue to reopen? Fathom expects that — unless there is a resurgence in the virus — economic growth will surge over the rest of this year as the money built up in savings is spent by households. This would drive inflation above central bank targets, and would pose central bankers the dilemma of how best to respond. The orthodox approach would see monetary policy tightened in the short term to bring inflation back under control. Alternately, higher inflation might be accommodated, even welcomed; and then embedded, by setting a higher inflation target down the line. As Fathom has long noted, there are strong theoretical grounds for adopting the second approach.[1] We consider this to be the most likely scenario in our latest Global Economic and Markets Outlook.[2]

[1] Will central banks adopt higher inflation targets?: https://www.fathom-consulting.com/research-notes/will-central-banks-adopt-higher-inflation-targets/

[2] ‘GEMO 2021 Q3: Inflation – deal with it, or roll with it?’: https://www.fathom-consulting.com/research-notes/gemo-2021-q3-inflation-deal-with-it-or-roll-with-it/

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