If Covid-19 caught the world napping this time a year ago, we are now thoroughly used to the virus. In the media it is inescapable. But while there is nothing novel about it, seeing the wood for the trees remains a challenge. In the UK, the rate of new cases is declining, but given the nature of the beast, hospitalisations and deaths as naturally lagging indicators will continue to increase for several weeks. With inoculations running at nearly 400,000 per day and rising, and 5 million about to have been vaccinated since the programme began in December (despite the inevitable carping in some quarters) these are amazing world-beating statistics. Eventually in late spring/early summer there will be a tipping point as the benefits of the vaccination programme and its herd immunity outweigh the further potential damage wrought by the virus. Europe is different: the collective EU vaccination scheme (in which we wisely chose not to participate) is mired in its own bureaucracy and plodding along, miles (kilometres?) behind. In the US, managing the virus and, as President Biden has said, putting America on a war-footing vaccination programme, is the belated top priority for his country.
As for the developing nations – many suffering enormously, but important vectors in the global spread of the virus and significant sources of mutations – resentment is building that while the pandemic is global, the distribution of vaccines is anything but. It is almost the medical equivalent of economic QE: the application of what appears a neat solution to the problem in reality creates division and tensions between the ‘haves’ who benefit, and the ‘have-nots’ who get left further behind. There are always long-term political consequences.
As the vaccination programmes crank up, it is clear the varying constraints of freedoms applied in different countries are here to stay for some time. In the UK for example, the current lockdown regime introduced immediately after Christmas and envisaged being in place until February half term, is now looking more likely to endure until Easter (indeed Sir Patrick Vallance, the government chief scientific adviser, offers the opinion that meaningful relaxations should not be expected before June, though ultimately it is a political decision).
From an investment perspective, where is all this taking us? The latest lockdown programmes have undoubtedly given rise to a renewal of economic weakness, though less severe than in the first wave: the W-shaped economic progression, though lop-sided. The fast data (monitoring weekly activity rates of public transport usage, traffic congestion, energy consumption, credit card usage, restaurant bookings, e-commerce activity etc) indicate similar patterns though of differing magnitudes in the US, the UK, Europe and India: a rolling-over in December and January but relatively muted compared with the cliff-edge seen in April. Hard, reported GDP data for 2020 is now starting to emerge, most notably from China which showed economic growth of 6.5% in the fourth quarter and 2.3% for the year as a whole (as one smug journalist couldn’t resist reporting, the lowest annual rate of growth in more than 30 years, which rather misses the point: when every other major economy will have shrunk in 2020 by percentages not seen in a century, the fact that China grew at all, and exceeded that of the US by around five percentage points and the UK by 12 percentage points, is a miracle of its own!).
It is against this backdrop that economists are attempting to estimate the rate of economic recovery. This year’s estimates are likely to be as erratic predicting recovery as they were last year predicting recession. The pandemic and the responses to it expose economics at its most raw: the total sum of all human activities with pound notes, dollars, euros, yen, yuan and any other currency on the front. Our current situation highlights the various constraints placed on the supply-side of the economy, and on the demand-side our ability, propensity, inclination and confidence to resume normal consumption patterns. The shifting policy sands create additional complexity, notably in the US following the election. The ephemeral concept of ‘confidence’ is key, and it was encouraging that the recent US Purchasing Managers’ Index for the manufacturing sector rose to 57 (a confidence barometer about business prospects rather than reported data, a score above 50 implies economic expansion, below 50 recessionary pressures are building; in context at its nadir it was in the 30s in 2020), demonstrating a positive frame of mind.
To illustrate the difficulty about pinning faith in any one estimate, investment bank Goldman Sachs was forecasting 2021 GDP growth in the US of 5.9% before 7th January when the consensus estimate was 3.9%; since then it has upgraded its estimate twice, this week raising it to 6.6%. Normally estimates are relatively tightly bunched, economists like wildebeest tending to prefer the safety of the herd. But turning points find opinions diverging, opening up the debate and creating investment opportunities.
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