In England, the long-awaited day when most official social distancing rules ended dawned with the UK government’s most senior ministers self-isolating. This extraordinary situation reflects the virulence of the Delta strain; it’s now driving a renewed rise in infections worldwide and fuelling concerns about whether recoveries underway in many economies will be derailed.
The honest answer is that it’s difficult to say with much certainty how big a threat the Delta variant poses to recoveries. If there is any lesson to be taken from the past year it is that the virus can evolve in ways that have consequences that are impossible to foresee in advance. Faced with such uncertainty, it is helpful to focus on what we do know, rather than what we don’t. Three things stand out.
First, having fallen sharply from May’s peak, the number of daily global infections has started to climb again in recent weeks. (See Chart 1.) This increase has been concentrated in a handful of countries in Europe (the UK and Spain) and Asia (Malaysia, Thailand and Indonesia). (See our COVID-19 webpage for full data.
Chart 1: Global Daily New Infections (7D MA)
Sources: Refinitiv, Capital Economics
Second, the rise in cases has been driven by the spread of the Delta variant of the virus, which is now the dominant strain in many countries. (See Chart 2.) Given how contagious the Delta variant is, it seems like a matter of time before case numbers rise in those countries where it now dominates.
Chart 2: Delta Variant Share of Total Infections (%)
Sources: Refinitiv, Capital Economics
Third, when it comes to assessing the implications for economies (and financial markets), it’s important to keep in mind that the hit to output is caused by measures to contain the spread of the virus, rather than the virus itself. What matters, therefore, is how governments respond to any increase in infections.
Beyond this, things get more uncertain. But the recent experience of the UK suggests there are reasons for cautious optimism. It is in the midst of a surge in cases of the Delta variant, but the evidence so far suggests that vaccines have greatly reduced hospitalisations and deaths caused by COVID-19
In the first two waves of the virus, which struck before the widespread rollout of vaccines, hospitalisations lagged infections by around two weeks, and deaths lagged by around four weeks. In the current third wave of the virus, infections began to pick up in mid-May but there has been only a modest rise in hospitalisations and virtually no increase in deaths. (See Chart 3.) The healthcare system is not buckling under the pressure. And the UK government has proceeded with its rollback of restrictions on activity and movement.
Chart 3: UK Cases of COVID-19 & Patients in Hospital
Sources: Refinitiv, Capital Economics
This raises the possibility that governments may not respond to a wave of new infections by imposing fresh restrictions that derail recoveries – but only if the rollout of vaccinations is sufficiently widespread. In other words, it is a race between getting jabs in arms and the spread of the Delta variant.
This is likely to play out in different ways in different countries. Most advanced economies are on track to get to UK-levels of vaccination within the next few weeks. Accordingly, while the spread of the Delta variant may temporarily exacerbate labour shortages as affected workers are forced to self-isolate, governments should not have to impose major new restrictions on activity that pose a major threat to economic recoveries. However, there are a handful of exceptions, notably Australia and New Zealand. And tourist-dependent economies such as Spain, Portugal and Greece may suffer if the European holiday season is disrupted by international travel restrictions.
The main threat, however, is in those emerging economies where vaccination rates remain low and rollouts are progressing more slowly. That includes almost all of Africa and parts of Asia and Latin America. While the economic impact wouldn’t be as bad as in previous waves – businesses and households have adjusted to the virus and social distancing measures – it would still have damaging repercussions.
Stepping back, even if the Delta variant doesn’t derail recoveries, it is becoming increasingly clear that we are likely going to have to learn to live with COVID long term. The break between hospitalisations may have been weakened for now but, as vaccine efficacy wears off and new variants emerge, that may not remain the case. And even if the nightmare scenario of “vaccine escape” fails to materialise, most scientists agree that “booster” shots are likely to be needed at some point, which could further set back the rollout of vaccines in EMs.
Market economies are adaptable and we still expect that most will adjust to the reality of a long-term COVID presence such that output eventually returns to its pre-virus trend. But developments over the past few weeks are a timely reminder that the path back to normality is unlikely to be smooth and different countries will proceed at different speeds.
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