Effective vaccine would be a game-changer - Capital Economics
US Economics

Effective vaccine would be a game-changer

US Economics Update
Written by Paul Ashworth
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The introduction of one or more highly effective vaccines early next year would prompt us to revise up our 2021 GDP forecast, possibly quite significantly. The prospects of a vaccine might convince Congress to scale back the size of any fiscal stimulus next year, but we don’t expect the Fed to change course – interest rates will remain at near-zero for a number of years.

  • The introduction of one or more highly effective vaccines early next year would prompt us to revise up our 2021 GDP forecast, possibly quite significantly. The prospects of a vaccine might convince Congress to scale back the size of any fiscal stimulus next year, but we don’t expect the Fed to change course – interest rates will remain at near-zero for a number of years.
  • The news from Pfizer yesterday that its coronavirus vaccine could be more than 90% effective is a potential game-changer for the economy. (See here.) We had anticipated that vaccines would become available next year, but thought the efficacy would be nearer the 50% to 60% mark, in line with flu vaccines. A less effective vaccine would have meant that physical distancing restrictions were maintained for the foreseeable future. But at 90% plus efficacy, there is a much higher chance that the virus could be eliminated entirely, allowing any remaining restrictions to be lifted.
  • Furthermore, the consensus seems to be that if Pfizer’s vaccine is genuinely that effective, then the competing Moderna vaccine, which is based on the same genetic engineering technology, could have broadly the same efficacy. And since nearly all the vaccines under development are designed to generate the same immunological response in the body, they are also likely to be more effective than we had previously assumed. The upshot is that multiple vaccines could be widely available from next spring onwards – at least in the US, although they might take longer to roll out in other countries that weren’t able to commit the development funds made available under the Trump administration’s Operation Warp Speed program.
  • The usual caveats apply – this was just a press release and the Pfizer phase three trials are only two-thirds complete. More data needs to be collected to make sure there are no serious side effects. We don’t know exactly how long immunity will last or whether it is effective across all age groups. The Pfizer vaccine specifically also has strict cold storage requirements that might make it more difficult to roll out. Nevertheless, the news is still very encouraging. The big fears surrounded the potential efficacy of these vaccines. If the scientists have done the seemingly impossible part, the logistics of production and deployment can surely be worked out over the next few months.
  • Life could largely return to normal next year, with activity in the still-depressed sectors like food services, travel and accommodation returning to their pre-pandemic levels, which would help to bring the unemployment rate down further. With the household saving rate currently as high as 14%, there is plenty of pent-up demand for these services. A large-scale roll-out in the US probably wouldn’t begin until the second quarter of next year and might take six months or more to complete. But if the vaccine really is that effective, then there is a possibility that restrictions could begin to be eased once vulnerable people and front-line workers had been vaccinated. At that point, there would be no reason to fear that hospitals could become overwhelmed any more.
  • The deployment of effective vaccines next year could also, somewhat counterintuitively, have negative effects on our GDP forecasts. With the light at the end of the tunnel now visible, there is the possibility that states would be more willing to impose draconian lockdowns to tackle the current spike in the infection rate, which could weigh on GDP over the next couple of quarters. (See here.) The prospect of effective vaccines might also convince Congress to scale back the size of any additional fiscal stimulus for next year.
  • The one thing we don’t worry about is that a return to economic normality would prompt the Fed to begin tightening monetary policy within the next few years. Fed officials were chastened by having to reverse course on the tightening cycle that began in 2015 and the recent changes to the policy framework will allow them to keep rates at near-zero even as the unemployment rate continues to get lower.
  • At this early stage, we are sticking with our already above-consensus forecast that GDP growth will be 4.5% next year, but the balance of risks around that forecast are now skewed to the upside. A game-changing vaccine introduced early next year would prompt us to revise that forecast to nearer 6%.

Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com