Financial markets and asset prices assume the COVID-19 pandemic is largely ancient history. However, there are several important reasons to be careful.
Firstly, despite high growth rates in many countries, global economic output will only recover to pre-COVID-19 levels at the end of 2022. In countries that have recovered, improvements are being driven by massive government and central bank intervention.
The global recovery may not continue unless this exceptional level of stimulus extends. Forecasts for future growth are subdued and reflect the superficial structure of government incentives. For example, April US income data shows a 13% decline, reflecting the withdrawal of some support measures. The American experience is replicated in many developed countries, albeit to a lesser extent.
The case for a return to stronger organic growth depends heavily on global consumers (who make up 60-70% of developed economies) spend their $ 3 trillion in excess savings. However, these savings are concentrated in households with higher incomes and less propensity to consume. The recovery also depends on job security, consumer confidence and whether rising wealth is temporary or permanent.
There are also hopes for greater private investment. However, such increases may focus on the few industries that can adapt their business models to a world with limited mobility or outsourced to technology platform companies that increase their capacity to meet demand. Some sectors, such as commercial real estate and travel, are unlikely to improve anytime soon.
Second, US Treasury bond rates have risen, driven by higher inflation expectations. This is due to base effects as well as increasing price pressure, for example higher food and oil prices, bottlenecks in the supply chain, especially for semiconductors, and rising shipping costs. Longer term factors such as the impact of economic sanctions, a decline 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 the latest data suggest a return to higher inflation or a short-term break in persistent deflationary pressures.
Since budget deficits worldwide will persist for many years to come, the supply of public debt could become increasingly problematic. If central banks reduce their purchases, which have absorbed all or a significant portion of the emissions, there will be upward pressure on interest rates.
Higher interest rates undermine the TINA argument (there is no alternative) that underlies the stock and real estate markets. Although still historically low, rising interest rates are affecting the housing market and investment decisions.
Third, the course of the COVID-19 pandemic remains uncertain. The technological advances in vaccine development have not been matched by the speed or efficiency of vaccination programs. Understanding the vaccine’s ability to prevent disease, hospitalization or transmission, effectiveness against variants, and short- and long-term side effects is still under development.
In developed countries, hesitation about vaccines, complacency and the unwillingness of the government to restrict personal freedoms to make vaccines mandatory mean that herd immunity remains elusive. For developing countries, vaccine nationalism and the poor health infrastructure of industrialized countries make their way out of the pandemic more difficult.
The likelihood of periodic outbreaks, lockdowns and resulting economic disruptions in advanced countries remains. Emerging markets are also a problem. Given their significant contribution to global growth, their key role in providing vital raw materials and as an end market for products, a weak recovery in emerging markets will hurt the world’s prospects.
Satyajit That’s a former banker. He is the author of “A banquet of consequences – Reloaded: How we got into this mess and why we have to act now ” (Vikings 2021).