By Satyajit Das
Financial markets and asset prices assume that the COVID-19 pandemic is largely ancient history. Yet there are several important reasons for caution.
First, despite high growth rates, global economic output in many countries will only recover to pre-COVID levels by the end of 2022. In countries that have recuperated, improvements are being driven by massive government- and central bank intervention.
Without an extension of this extraordinary level of stimulus, the global recovery may not continue. Forward growth estimates are muted, reflecting the front-end loaded structure of government stimulus. U.S. personal income data from April, for example, show a decline of 13%, reflecting the winding back of some support measures. The American experience is replicated in many developed countries, albeit to a lesser degree.
The case for a return to stronger organic growth relies heavily on global consumers (who make up 60%-70% of developed economies) spending their $3 trillion in excess savings. However, these savings are concentrated in higher-income households with a lower propensity to consume. Recovery also depends on job security, consumer confidence and whether rising wealth is transient or permanent.
There are also hopes for greater private investment. But such increases may be concentrated in the few industries that can adjust their business models to a mobility-restricted world or given to technology-platform companies boosting capacity to meet demand. Some sectors, such as commercial real-estate and travel-related industries, are unlikely to improve in the near term.
Second, U.S. government bond rates have been rising, driven by higher inflationary expectations. This is the result of base effects as well as increasing price pressures, for example, higher food and oil prices, supply chain bottlenecks, most notably in semiconductors, and rising shipping costs. Longer-term factors, such as the impact of economic sanctions, declines in short- and long-term worker mobility and a focus on national self-sufficiency in certain strategic areas, are also relevant. It is unclear whether recent data foreshadows a return to higher inflation or a short-term interruption to sustained deflationary pressures.
With budget deficits set to continue globally for many years, the supply of government debt may be increasingly problematic. Where central banks reduce purchases, which have absorbed all or a significant portion of issuance, there will be upward pressure on rates.
Higher rates undermine the TINA (there is no alternative) argument underpinning equity and property markets. While still historically low, rising rates affect the housing market and investment decisions.
Third, the trajectory of the COVID-19 pandemic remains uncertain. The technological achievements of vaccine development have not been matched by the speed or efficiency of vaccination programs. Understanding of the vaccine’s ability to prevent disease, require hospitalization or impede transmission, effectiveness against variants as well as short- and long-term side effects is still evolving.
In developed countries, vaccine hesitancy, complacency and government unwillingness to impinge on personal freedoms to make vaccines mandatory means that herd immunity will remain elusive. For developing countries, the developed world’s vaccine nationalism and poor health infrastructure complicates their path out of the pandemic.
The chance of periodic outbreaks, lockdowns and resultant economic interruption in advanced nations remains. Emerging economies are also a problem. Given their substantial contributions to global growth, key role in supplying essential commodities and as an end-market for products, a weak emerging-market recovery will affect the world’s prospects.
Satyajit Das is a former banker. He is the author of ”A Banquet of Consequences – Reloaded: How we got into this mess we’re in and why we need to act now’ (Viking 2021) .