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The virus is still costing the economy dear

Despite the equity market exuberance as vaccines boost recovery hopes, the spread of Covid-19 is still having a significant economic impact and will have for some time to come.

Despite the equity market exuberance as vaccines boost recovery hopes, the spread of Covid-19 is still having a significant economic impact and will have for some time to come.

Charles Stanley

in Features


Equity markets are well advanced in pricing in a strong economic recovery this year from the lockdowns on both sides of the Atlantic. It still seems likely that as the vaccines roll out as the days lengthen – and the northern hemisphere finds some more ultraviolet light – there will be a progressive relaxation of controls on social distancing.

We then expect the pent-up demand for travel, hospitality, entertainment and events to come out, with a rush of new spending by all those on better incomes who have been forced savers during the long, dark months of lockdown.

It is not yet time to take government responses to Covid-19 out of our scenarios. The virus is still having a big impact on economic life, with the state of Victoria in Australia having to move into a third lockdown and send spectators away from The Open tennis tournament. Japan still plans to go ahead with the Olympics this summer, but 80% of the Japanese public wish it would cancel or delay again.

Many economies and markets are still dominated by the many positive stimulus actions taken by central banks and governments on the one hand - and by the continuing damage the disease and the lock downs are doing on the other. Everyone is saddened by the number of deaths and wishes to see more progress in controlling the pandemic.

Whilst there are signs of the virus waning on both sides of the Atlantic, governments that are going round the lockdown and relaxation cycle for the second or third time are not in any hurry to relax the restrictions. They are also preoccupied by scientists finding new strains or variants, with the possibility that one may escape the immune response that current vaccines create – requiring yet more research and further inoculations to finish the job.

Israel and the UK are vaccine heroes

So far, after Israel the UK has done the best job at vaccinating large numbers of the most vulnerable people. The US is now accelerating its efforts. The European Union is slower, taking longer to approve vaccines and longer to buy them and roll them out. The pace of vaccination is likely to be an important variable in determining the pace of relaxation. The US could replace its lost output by the end of this year. China has already exceeded pre-pandemic output. The Euro area is likely to be behind 2019 levels as we enter 2021.

The official figures supplied by most countries to the world authorities are available on a website. They show some big divergencies in how many cases each country experiences, and in how many people die from the disease. They reveal a bit less damaging experience for most of Asia and Africa, and a bad experience for much of Europe and the Americas.

For the world as whole, 1.3% of the population have now had Covid-19 and 0.03% have died of it or with it. In the Chinese ambit, Taiwan has been particularly successful with just 39 cases per million people and 0.4 deaths. Mainland China has kept its death rate down to just 3 per million, with 62 cases per million.

Meanwhile, Hong Kong has reported 1,424 cases per million and 25 deaths per million despite also having strict controls. It may be that the better experience in Asia generally owes something to diet and past exposures of people to related viruses, which may have boosted immune systems. Others think Asian populations have taken the controls more seriously – and done more to avoid travel and contact with each other.

In Europe, Spain, Italy and the UK (of the larger countries) have had high infection rates and notable death tolls. Belgium remains the worst outside a few tiny states, with a death rate of 1,855 per million. The US has one of the worst case-rates, at 8.4% of the population compared to 5.9% in the UK and just 2.8% in Germany. The US has a better death rate compared to case rate, with deaths at 1,466 per million.

Surprising US success

This implies America has been more successful at treating the disease, with a wider range of drug options, and/or been better at testing for mild or unseen versions of the disease through widespread testing. The great success of Taiwan at keeping down case rates and deaths has enabled that economy to recover all the modest output losses of early 2020 and to continue with decent growth, fuelled by a semiconductor shortage. All this reminds us to watch an individual country’s progress combatting the infection, as the duration and severity of lockdowns has a big impact on turnover and profits of companies.

The biggest risk to the recovery story for economies remains the sudden emergence of a new strain of the virus that spreads rapidly and is resistant to known vaccines. This would force any additional lockdowns to be imposed for longer, as we waited for research to catch up and for new vaccines to be approved. It would also mean new programmes of vaccinating people who have already had the jab, eroding the advantage of the fast vaccinating countries.

Meanwhile, debate rages over what the new normal will look like. There should be strong recoveries in leisure, sport, entertainment and hospitality – but permanent shifts in traditional shops, work patterns and some work-related travel.

Markets, as expected, are moving upwards on a broader range of shares and sectors than last year, when money jostled to buy assets in the limited areas that benefitted from lockdown. It remains a good climate for equity investing. We need to remain vigilant for any reduction in fiscal and monetary stimulus, which is crucial to the whole story, and the evolution of the virus in case a random mutation produces something nastier.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal

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