Sisyphus Happy?

We review the latest instalment of the “debt ceiling drama”, the spread of the “delta variant” and the ECB’s new forward guidance.
Gilles Möec

Chief Economist

AXA IM

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We have been focusing for some weeks on the “technical factors”, such as the gyrations in the federal government cash reserves, which may help explain the recent correction in US long-term yields. But proper macro factors are also at play and we need to take a hard look at the latest developments on the pandemic front.

Virus Resilience

For now, the reopening is still in full swing across most of the developed world. The real-time indicators such as the Google mobility indices suggest that the level of activity is significantly higher than during last year’s “false dawn”. Since the starting point in the spring was less negative, sequential GDP growth between Q2 and Q3 2021 may be less spectacular than in 2020 – but over the two quarters taken together, for now it looks like the gains are going to be very strong, unless of course restrictions have to resume.

We continue to look to the UK for clues. Habitual readers of Macrocast will know of our modelling attempts, predicting hospitalizations with the number of new cases and the vaccination rate. If we apply this to the UK’s Secretary of Health’s recent estimate of possibly a 100,000-case load by the end of the summer, this would get us to a level of pressure on the healthcare system last seen in February, past the last wave’s peak but still problematic . The latest data from the UK are more encouraging than what the Minister’s estimate implied though, with the beginning of a deceleration in the number of new cases over the last 5 days. Since lately schools had been a key source of new infections and the school year is ending, often ahead of schedule because of the number of children asked to isolate, this may not be surprising. The improvement still needs to be confirmed though, as all restrictions have now been lifted and alternative sources of infection may be emerging.

In most other European countries and in the US the number of infections is accelerating, and in most cases the vaccination rate of the population is lower than in the UK, which would be consistent with even more pressure on their healthcare systems down the road. However, in most advanced economies, every new wave has had a lower impact on economic activity than the previous one. There are good reasons to think the same pattern will apply to this one. A key development there is the beginning of a shift towards tailoring mobility restrictions to vaccination status. This raises all sorts of thorny legal and political issues but allowing the continuation of contact-dependent activities for fully vaccinated people would eliminate the need for blanket prohibitions in key services industries which have been badly hit by the pandemic, a key source of economic damage. France and Italy are clearly taking this route.

It would be impossible to avoid all the adverse effects on the growth trajectory though. Beyond government decisions, the impact of a new wave on activity depends on people behavior, and a measure of “precautionary avoidance”, including by people already fully vaccinated, will likely affect contact-dependent activities. On the supply-side, some level of disruptions is likely to persist, if only as “contact tracing” forces some workers to isolate (in the UK the impact is already visible in key sectors such as retailing and transport). Looking beyond domestic industries, the resurgence of Covid-related concerns in the West should act as a reminder that in many countries, vaccination rates remain too low to seriously dent another wave. This is of course the case in many developing countries, but some advanced nations such as Japan and Australia are in the same situation. This will impair the overall normalization of the world economy and hence global trade.

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Sisyphus Happy?