The economic effects of a vaccine

  • The development of a vaccine would represent a breakthrough in the public health battle against Covid-19, but it would not necessarily transform the immediate economic outlook.
  • President Putin yesterday announced that Russia had become the first country to grant regulatory approval to a vaccine against SARS-CoV-2, the novel coronavirus that causes Covid-19. Some experts have questioned the efficacy of the Russian vaccine and the extent to which it will be used outside of the country. But even so, six other vaccines that are being developed separately in the US, Europe and Asia are in the third and final phase of efficacy trials and three more are likely to enter this final phase of development over the next month or so. (See Chart 1.) A further 200 vaccinations are being pursued, around 50 of which are likely to enter human trials in 2020.
  • The timeline for development is still unclear. Most experts now believe that a vaccine may be available in the US, Europe and Asia by the end of this year or Q1 2021 – probably granted under Emergency Use Authorisation (EUA) guidelines that permit the accelerated development of treatments in emergency situations. More are expected to follow throughout the course of 2021.
  • The speed of development has been remarkable. Until now, the fastest time to develop a vaccine against a novel virus had been four years. It now seems that one will be developed within 12 months. This could transform the battle against Covid-19.
  • However, from the narrow perspective of the global economy the issue is not as simple as whether there is or isn’t a vaccine. Instead, the economic effects of a vaccine will be governed by three factors.
  • The first is the efficacy of the vaccine itself (i.e. the extent to which it immunises those that receive it against the disease). No vaccine is 100% effective – in the US, for example, the FDA usually targets an efficacy rate of around 80%. For the SARS-CoV-2 vaccine the bar has been lowered to 50% (reflecting the compressed timetable for development and the fact that it often takes time for vaccines to reveal their efficacy). This clearly leaves a large range of potential outcomes, ranging from a vaccine that is effective in one out of two cases to one that’s effective in four out of five.
  • Other issues to consider include the longevity of the vaccine, its safety and how willing people are to use it, particularly given the short development time, the extent to which it reduces the severity of the disease in vaccinated people who still contract it, and whether it is delivered alongside so-called therapeutics, which alleviate symptoms of the disease but not the disease itself. There remains significant uncertainty around all these issues.
  • The second factor that will determine the economic effects of a vaccine is the speed at which it can be produced. The headline numbers look impressive: reports from developers suggest that close to one billion doses may be available this year, with a further seven billion following in 2021. However, this is spread across several vaccines and it is not yet clear which of these will succeed or how fungible production will be. (See Chart 2.) It’s possible that the actual number of available doses could be significantly lower. Initially, at least, supply is likely to be constrained on the basis of need. Mass immunisation may be some way off.
  • This brings us to the third factor that will govern the economic consequences of a vaccine: the speed of distribution. There is a national and an international dimension to this.
  • It is not inconceivable that, given the acceleration in US-China decoupling over the past six months, geo-political factors could influence the distribution of a vaccine. In practice, we suspect that this won’t be the case. China has already stated that it would make a successful vaccine available to all countries. And being the first country to produce and disseminate a vaccine against a global pandemic would confer considerable soft power benefits on China.
  • Instead, international distribution is most likely to be influenced by the cost of production. Most estimates suggest the vaccine will cost around $20-50 per dose, putting mass immunisation out of reach of several poorer EMs. Meanwhile, advanced countries have already pre-ordered significant stocks of different vaccines under development. (See Chart 3.) This is likely to produce a two-speed process of global immunisation - with many EMs lagging well behind DMs, and reliant on the support of international institutions and foreign aid to fund, distribute and administer treatments.
  • There are national distribution issues to consider too. Just as some countries have been more successful in rolling out testing and tracing procedures, so some are likely to be better at rolling out the vaccine. This will be influenced by a variety of factors, including the quality of public health systems and the ability to co-ordinate across different parts of national and local government. A key challenge, at least initially, will be to identify and administer the vaccine to those most in need.
  • As we’ve noted before, the road back to economic normality lies in stamping out the virus. The development of a vaccine will be key to that and, in this sense, it goes without saying that the sooner it arrives the better. By the same token, however, it would be wrong to assume that the development of a vaccine will necessarily transform the economic outlook for 2020-21.
  • Instead, it is better to think about a range of short-term vaccine-related outcomes for economies, governed by the issues discussed in this note. At one end of the spectrum lies a highly effective vaccine that is produced and distributed quickly. At the other, lies a less effective vaccine that faces significant production and distribution challenges and would be in relatively short supply in 2021. (See Table 1.) Both situations would be better than the current state of not having a vaccine at all. But in most scenarios, it is likely that containment measures, including social distancing and restrictions on some foreign travel, will remain in place for the foreseeable future.
  • Accordingly, the prospect of a vaccine being developed in the next six months or so does not necessarily justify an upward revision to our forecasts for 2020-21. Until we have clarity on the factors discussed here, we will leave our key forecasts unchanged. And whatever happens, the virus will leave in its wake a weaker global economy bearing a much higher debt load.

Chart 1: Announced Clinical Trial Timelines
for COVID-19 Vaccines

Chart 2: Estimated Manufacturing Capacity by Vaccine (Billions)

Sources: Press Reports, Milken Institute, Capital Economics

Sources: Press Reports, Capital Economics

Chart 3: Number of Vaccine Doses Secured Per Capita

Table 1: Characteristics of High and Low Impact Vaccines

Sources: Press Reports, Milken Institute, Capital Economics

Source: Capital Economics

Neil Shearing, Group Chief Economist,

Neil Shearing Group Chief Economist
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