At the beginning of the year there was widespread optimism for the outlook for 2021. Vaccine rollouts were starting to accelerate across most western economies. However, the combination of a more transmissible variant of the COVID-19 virus (Delta), and the fact that the vaccines, while efficacious against illness, do not entirely prevent infection or halt transmission, mean that even highly vaccinated countries such as the UK continue to face elevated infection and fatality rates for the time of year. Meanwhile, countries in the Asia-Pacific region which had previously succeeded in near-eliminating COVID have now imposed tight restrictions and are struggling to contain cases. Risks to the economic outlook thus remain higher than was hoped.
As the vaccines have weakened the link between cases and severe illness, we continue to assume that countries with high vaccination rates will not return to lockdowns, despite Delta. Countries like the US and the UK do however continue to face downside risks due to the potential for voluntary changes to behaviour. Indeed, the recent increase in cases stateside appears to have had this effect, with consumer confidence slumping in August and high-frequency data pointing to reduced spending on high-contact activities such as dining. However, it is too early to draw firm conclusions.
UK data suggest that the population is comfortable with engaging in social spending while infections and hospitalisations are at current levels, but there is a possibility that this could change in the coming months. Average confirmed daily new cases have been around 33,000 over the past seven days, which is 27 times higher than at this time last year. Due largely to vaccines, the relative strain on hospitals has been much less severe. Last year, average daily fatalities rose by a factor of 100 between the end of August and the end of December. Nobody expects anything like that to occur again, but there is a high degree of uncertainty over what happens next. One possibility must be that the number of fatalities continues to increase, perhaps leading to voluntary changes in economic behaviour, particularly among older and more vulnerable cohorts.
If Delta poses danger to highly vaccinated countries, it risks much worse in countries with large susceptible populations. Indeed, some star performers during the first part of the pandemic have struggled this year. Successful strategies in 2020 tended to involve imposing non-pharmaceutical interventions early in order to drive cases to zero or near zero, coupled with border restrictions in order to ensure new waves were not seeded. Many countries in the Asia-Pacific regions followed this playbook, with positive results: in Australia, China, New Zealand, Korea and Taiwan, early intervention prevented sustained negative health outcomes, which in turn allowed economies to reopen earlier and for longer.
But things have changed. The Delta variant has proved capable of piercing previously formidable defences. So far, China is the only country that has been able to successfully contain a Delta outbreak back to zero. By contrast, Australia and Vietnam are both facing sustained case increases despite stringent restrictions. The presence of large susceptible populations, due to slow vaccine rollouts and low natural immunity, means that these countries are ripe breeding grounds. Meanwhile, both have calibrated their response to be highly sensitive to rising cases, meeting relatively low caseloads (by international standards) with extremely stringent restrictions. The direct effects of these policies risk being exacerbated by indirect effects from continued pressure on supply chains, that cause global shortages in key components and put upward pressure on prices.
As a result of the Delta variant, there are downside risks to both demand and supply, raising the spectre of slightly weaker growth but relatively firm prices — an unfortunate and unwelcome trade-off for policymakers. However, these risks are likely to prove temporary. Public health experts continue to believe that COVID-19 will eventually reach a point of endemicity, with some winter waves larger than others, but most likely to be small enough for us to cope with without significant disruption. Until that point arrives, the virus will continue to influence demand and supply, making the jobs of investors and policymakers trickier than usual.
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