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News 11/10/2020

Will the economy be rapidly vaccinated against the virus?

Will the economy be rapidly vaccinated against the virus?

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Bruno Cavalier
Chief Economist at ODDO BHF

 

Encouraging news about the discovery of an effective vaccine against coronavirus saw equity markets sky rocket yesterday. This reaction reflects a scenario in which the global economy could be expected to rapidly return to 100% of its pre-virus activity conditions - whereas, in the current situation, most countries have recovered just 90-95% of their capacity, with little hope of making up the rest before several quarters. We examine here (in a somewhat fictional mode, as this vaccine has yet to be produced on a large scale) what changes this scenario would trigger in the economy and economic policy.

Give me one more, one more shot (Jagger/Richards)

It has often been said in these pages1, but there is no harm in repeating it again, the crisis caused by the coronavirus differs in general and in detail from an ordinary economic crisis. Its origin, its sudden onset in the absence of prior macroeconomic imbalances, its magnitude, its geographic reach, the reactions of central banks and fiscal authorities that it provoked, nothing in this crisis fits into the canon of recessions. Can we also imagine that the way out of this crisis will also be atypical, i.e. quick and miraculous rather than long and painful? This would be the case, for example, if an effective vaccine were produced and distributed on a large scale fairly rapidly. This question comes after yesterday's announcement of clinical trials perhaps pointing in this direction. For the sake of our imagined scenario, let us therefore place ourselves in the working hypothesis that the entire global economy will rapidly be vaccinated against the coronavirus. What will be the consequences?

 

 

Let us take as our starting point the situation after three quarters marked by the pandemic. Globally, the level of activity in Q3 2020 was 3-4% below its pre-pandemic level (Q4 2019), after having fallen by almost 10% at its peak.2. This figure is "inflated" by the contribution of China, which to date is the only major country to have really overcome the shock of the coronavirus3. For the other major economies, the loss of activity is between 5 and 10% compared to the pre-virus level, after instantaneous losses of up to one-third at the depths of the March-April lockdown. In any case, the global economy has trended far below its normal capacity (chart lhs). The number of unemployed is considerably higher than a year ago (chart rhs) - a number moreover underestimated due to measurement errors triggered by short-time working regimes. The longer the period of under-employment of the factors of production, the greater the risk that part of the activity potential will be permanently destroyed. Employees kept out of the labour market will lose their skills as companies postpone capital spending on both expansion and renewal. It is not immaterial to ask whether the shock will be erased in one year, two years, three years, or never.

 

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