Weekly review: global recovery continues: is the war against the virus won?

Macro Update 2 August 2021
August 2021
Steven Bell

Steven Bell

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


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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.

Key takeaways

Global recovery continues: is the war against the virus won?

In the developed world, high and rising rates of vaccination mean that restrictions are gradually being lifted. The UK is demonstrating that it is possible to lift restrictions even as new cases are high and rising without precipitating unsustainable rates of serious illness and pressures on healthcare systems. But it is still early days.

New variants have emerged that are considerably more infectious, but none has so far ‘escaped’ the vaccines, which remain highly effective at preventing serious illness. Until such a variant does emerge, we can say that the virus has become endemic in developed markets, serious lockdown restrictions are unlikely to return, and economic recovery will continue with the associated boost to earnings. This is good news for risk assts.

Variant risks remain, but would not lead to the shutdowns of last year

But what if a variant does emerge that weakens the power of vaccines? Yes, that would be a setback, and a serious one at that. Yet, the researchers are confident that they would be able to quickly tweak the vaccines, the regulators say that lengthy trails would not be necessary, and a new programme of mass vaccination could start within a few months. All in all, it would be a difficult development but not disastrous. There would be no repeat of the mass closure of economies.

A different story in emerging markets, and a divergent one

Vaccination rates are generally low and health care systems are more easily overwhelmed. It will take time, a long time, before they catch up with the vaccination levels in developed markets. But not every country is in the same position. India, once the worst affected major country in the emerging markets, has seen the epidemic recede and figures released this week showed the manufacturing PMI leap from 48 to over 55. By contrast, Indonesia, where the virus has surged, saw its PMI fall from 53.5 to just 40.

For much of the emerging world, it’s a case of living with the virus, with high vaccination levels attainable only in 2022. For investors, I still think that developed market equities look more attractive.

The UK: good news on immunity and the economy but recruitment is an issue

Evidence that Boris Johnson’s big gamble is working continues to accumulate. New cases are declining, and even if they plateau form here-on-in, the rate of serious illness has remained low; the NHS has coped with room to spare. Total numbers in hospital with Covid are just 5,000, compared with almost 40,000 during the peak in January. With over 60% of the 18-24 year-olds now having had at least one jab, the acceptable rates of hospitalisations exceed those in almost every other country. Booster jabs are being planned for the at-risk groups in the autumn.

Meanwhile, the economic recovery continues apace, and far from the mass unemployment that many feared would follow the winding down of the government’s furlough scheme, for many businesses, the problem is recruiting workers.

Central bank action

The Bank of England meet this week and although they will no doubt repeat much of the dovish tone that has characterised recent statements, they will also be making big upward revisions to their inflation forecasts. Growth prospects will also be revised up. Tapering of their QE programme is on the cards and fears that inflation may prove more enduring will be rising amongst members of the Monetary Policy Committee (MPC).

But it is in the US where the main action is this week, with the next set of payroll numbers. These could show a million new jobs in July; we shall see. Either way, progress towards ‘high employment’ is underway. The other objective: 2% inflation ‘looking backwards and forwards’, under the Federal Reserve’s new average inflation targeting regime has already been met, so it is clear that tapering is likely to take place before year-end.

Is the war against the virus won?

It is too early to declare victory, especially for emerging nations, but the tide has certainly turned for developed markets, and we can see that a return to something like normality is underway. Let’s keep our fingers crossed.

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