Macro views

Where will the Vaccine take us?

Steven Bell looks at what the introduction of the new vaccine could mean for the economy.
November 2020

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions

LEARN MORE ABOUT THE AUTHOR
Share
Subscribe to our Insights

Risk Disclaimer 

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

The news that the Pfizer, Moderna and Oxford vaccines are highly effective has brought much needed optimism to the financial markets (and the world in general).

However, several questions remain:

  • How long will the protection from these vaccines last?
  • How far will they reduce transmission, as opposed to reducing or eliminating symptoms?
  • What are the timelines for the programme of mass vaccination?
  • How will economies respond; in particular, when can we hope to get back to ‘normal’?

We do not know the answer to (i) and the answer to (ii) will be a question of degree. By reducing symptoms such as coughing, a vaccine will reduce transmission to some extent, but by how much will only be known when the vaccination programme gets underway.

As far as the timeline for mass vaccination, much depends on when the approvals by each country are received. The Oxford vaccine is especially important for the UK, as the British government have only ordered a small number of doses of the Pfizer vaccine and their supply of the Moderna does not arrive until the spring. By contrast, they have ordered enough doses of the Oxford vaccine to cover almost the entire UK population.

The Phase 3 trial results for the Oxford vaccine, whilst at first glance looked a little disappointing with efficacy of 70%, lower than the very high bar set by the Moderna and Pfizer vaccines, a sub-set of the results showed 90% efficacy. Bettering this news still, is that the Oxford vaccine can be stored in a conventional refrigerator, in comparison to the Moderna vaccine having to be stored at -20 degrees Celsius, and the Pfizer vaccine having to be stored at a bracing -70 degrees Celsius.

Further good news has been shared in relation to the Oxford vaccine by Oxford Professor, Andrew Pollard. First, that it was 100% effective in preventing the need for hospitalisation and second, evidence suggested that it reduced asymptomatic infection and would reduce infection rates. With a staggering 3 billion doses planned for production in 2021, we can feel confident that we have a way out of the nightmare induced by the terrible disease.

Taking this into account, there is now a distinct possibility that the UK will be able to begin a programme of mass vaccination in the coming weeks, hopefully providing sufficient coverage to allow lockdown restrictions to be fully eased by the spring. This is indeed the view of the distinguished immunologist, Professor John Bell.

The rest of the developed world will not be far behind. Emerging markets will be slower, but China has its own supplies and other emerging markets should have reasonable coverage by the end of 2021.

Given this, when can we expect a return to normality for economic activity and corporate profits?

We are sceptical of claims that ‘scarring’ will permanently depress economic activity. This has been a deep and uniquely sharp recession. But it has also been short and accompanied by unprecedented policy support. Many consumers are actually better off than they were pre-COVID and business bankruptcies have been very low. Nonetheless, the world economy will have to follow a difficult path over the next several months, not forgetting that infection rates remain worryingly high.

Our best guess is that UK economic activity will get close to pre-COVID levels by this time next year, as the chart indicates. But the path to that will be far from even and we are set for a difficult few months. GDP is likely to decline over the next few months, with rapid growth in the late spring and summer.

We expect a deal to be struck on Brexit, but this is no means certain, and even with a deal, there will still be significant disruption. The housing market has been strong recently, supported by pent up demand and the stamp duty holiday. That being said, mortgage rates have risen significantly for higher-leveraged loans and the holiday is due to end next March. Around the same time, companies will have to pay arrears on VAT and with the eviction ban ending, landlords will be demanding rent arrears.

Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested. The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Use our handy glossary to look up any technical terms you are unfamiliar with.

UK GDP

chart

Source: Bloomberg

Other countries will face their own problems, and some will struggle to implement mass vaccination quickly or efficiently. Almost all countries will face the overhang of debt. Governments are under little pressure to repay theirs, but the private sector may not have this luxury.

The key issue for investors is whether the markets can look through this period of weakness, with a confidence that recovery will follow. Providing the vaccine news remains positive, we think they will.

One feature that does not concern us is inflation. Many investors are concerned that the sheer scale of budget deficits and the associated monetary financing will lead to inflation. But there is significant downward pressure on inflation at present, and this will continue until economies return to normal.

But what if the vaccine news turns sour? We are not too concerned about take-up. Surveys do suggest that a significant proportion of people say that they will not accept a vaccine, especially in the United States where it has become something of a political issue. Yet the evidence from other ‘vaccine scares’ that notably related to MMR, is that the impact is significant but small. Were serious side effects to be identified, lack of take-up could become a problem, but none have been identified as of yet, and the experience with other vaccines suggests that longer-term side effects are typically treatable. So, this is a worry but not a major one.

There are also fears that the resistance provided by the COVID vaccines could wear off quickly. Time will tell, but on a worst-case scenario, annual jabs would become necessary. And of course, as transmission falls, infection rates would decline anyway.

 

Where does this leave us?

The virus has changed the world, damaged as well as taken lives, and left us with huge piles of government debt. Yet medical science has provided us with the solution in record time. The loss of economic output has been huge. But the route to recovery is clear, at least in the broad outline. By the end of next year – and possibly earlier – we will get back to pre-COVID levels of economic activity and corporate profits.

Subscribe to our Insights

Related articles

No posts matching your criteria