The post-Covid-19 global economy, flooded with multiple vaccines that boast of efficacy rates north of 70%, brightened by economic optimism as various countries restart activities in shuttered sectors, and supported by the sustained dovish commitments of fiscal and monetary authorities alike, is however still predominated by the downside risks posed by the virus itself.
By no stretch of the imagination has the elephant in the room changed in form or type, as the virus, in a characteristic manner, continues to mutate into variants that are more evasive of available preventive and treatment measures. The uncertainty caused by fast-spreading popular variants of Covid-19, like Delta, reverberates through the global economy, forcing health experts and economists to redeliberate whether restrictive measures are needed to rein in the spread, albeit with the unavoidable consequence of a self-induced economic slowdown.
The possibility of new restrictions on movements and businesses gives an unpleasant nostalgia of the 2020 pandemic year, as countries might once again have to make an unfair choice between the economy and health. Hence, trapped between the devil and the deep blue sea, either of both choices come with an undue amount of suffering, but many will argue that you lose on both sides if the economy is prioritized over health.
The threat posed by Covid-19 was recently emboldened by a new “mu” variant, which could potentially evade protections offered by available vaccines and natural infections.
Accordingly, Covid-19 still poses a significant threat to everything, and from an investment perspective, every major threat must be proactively anticipated, as sheer optimism offers no real protection to portfolio value.
Bad for all, worse for some
Asides from social distancing rules, mask-wearing, and other preventive measures recommended by health authorities, Covid-19 vaccines have been flaunted as the near-permanent antidote to a Covid-19 induced global chaos. The idea is to inoculate enough people to provide some sort of herd immunity, and remarkable progress is being made on this front, particularly in developed nations.
With over 5.42 billion doses of Covid-19 vaccines administered globally, equivalent to 71 doses for every 100 people, there appears to be meaningful progress in the global pace of vaccination. However, these numbers mask the various contours that exist in the vaccination pace by regions and countries, with the progress made having a lopsided distribution, skewed towards countries and regions with the highest incomes.
To better illustrate, 40.10% of the world population has received at least one dose of a Covid-19 vaccine, while merely 1.80% of people in low-income countries have gotten their first dose. Accordingly, low-income countries like Nigeria, have recorded very little progress in vaccination relative to developed nations like the United States. Hence, with the renewed threat posed by variants of the virus, the lagging pace of vaccination will only make an already gloomy situation worse in underserved economies.
Should the downside risks materialize
After an examination of the further risks posed by the Covid-19 pandemic, it is imperative we examine the possible impacts on the global economy should the risks materialize as a consequence of the virus getting out of control.
New restrictions: A trade off between economic reopening and restrictive measures to curb the spread of the virus should be anticipated, with the latter prioritized. Currently, restrictions have been introduced in parts of China, Australia, and several other countries in response to the threat posed by the fast-spreading delta variant of Covid-19. The consequence of these restrictive measures would have a telling impact on the ongoing global recovery. To exemplify, the rising impact of the Delta variant of COVID-19 on the U.S. economy, caused the pace of job creation for August 2021 to falter, with the economy adding just 235,000 jobs in the review period, relative to a 720,000 job accretion projected by Economists surveyed by Dow Jones, and a 1.053 million nonfarm payroll uptick recorded in the preceding month.
An initial risk-off sentiment: As the virus becomes more of an imminent threat, we expect to see a risk-off reaction, involving the selling of riskier assets to move into less risky or safe-haven assets. This would cause commodity prices like crude oil to falter, while investors force U.S. treasury yields to compress due to growing interest.
Extended dovish commitment: Monetary and fiscal authorities are expected to sustain their dovish policy stance should Covid-19 renewed risks become more material. The accommodative stance should continue to stimulate the global economy, cushioning the potential impact of a Covid-19 induced economic contraction.