The developed economies are close to reaching herd immunity by the end of summer 2021. Is it enough for global economic growth to reach pre-pandemic levels?
In November 2020, the world found out that, according to trials, vaccines against the COVID-19 virus are effective. The studies showed declining infection rates and efficacy levels close to 100% in some cases.
Optimism, therefore, spurred a huge rally in financial markets. The equity markets reacted first, with most indices reaching all-time highs. The bullish trend that started in November 2020 is still very much in place.
The euphoria seen in the equity markets translated into general US dollar weakness. The EUR/USD, AUD/USD, and GBP/USD all posted yearly highs against the dollar. Finally, the world could see the light at the end of the tunnel.
Fast forward six months to May 2021, all promises were met. Vaccines do work if we look at the declining infection, hospitalisation and mortality rates, in the countries that have vaccinated most of their adult populations (e.g., United Kingdom, the United States, Israel, the United Arab Emirates).
While this is exciting news, one must keep a cool head. A long road lies ahead for the world to reach herd immunity (i.e., 70%-85% of the population vaccinated).
According to recent projections by Moody’s Analytics, only about 10% of the world’s adult population has received a COVID-19 vaccine by now. Effectively, it means that global herd immunity level may not be achieved until mid-2023.
What are the implications for the global economy?
Heal Globally, Act Locally
The COVID-19 pandemic brought about a change to globalisation as we knew it. Even before the pandemic, the United States, under then-President Trump, favored protectionist policies.
America first – remember?
The pandemic fostered similar reactions in each country. Suddenly, the main task was to defeat the pandemic first and to rebuild the economy second.
Stock market indices are viewed as key indicators of the business cycle. It leads the economic recovery by at least six months on average, according to studies.
In the case of the United States, the largest economy in the world, the equity market acts as a benchmark for the world’s economy. At least, it did so until the pandemic.
It has outperformed since last November, mostly reflecting the local progress against the pandemic, but also the economic recovery spurred by the fiscal and monetary stimulus. Moreover, corporate America’s profits outpaced expectations, especially tech companies that benefited from the shift in consumer behaviour.
But the road ahead looks bumpy for global economic growth. Only after the global population reaches herd immunity can we talk about growth on a global scale as before the pandemic. Therefore, one should not be surprised by stock market corrections in the years ahead.
Global economic interdependence remains as strong as ever, as suggested even by the vaccine production process. Acting locally may work for a while, but healing globally is key for future economic growth.