Covid casts further shadows over recovery

Just as the recovery slows, Covid-19 is spreading more rapidly. This could spark a response that makes stagflation more likely.

| 4 min read

As winter approaches in the main northern hemisphere economies of the US, the EU and China, so the virus becomes a renewed menace.

It is true the incidence of serious disease and death is much reduced wherever there are high rates of vaccination, but as the World Health Organisation (WHO) points out – even with vaccinations the virus might spread where rules have been relaxed and where there are unvaccinated people to help its transmission. Vaccinated people too can catch it or can pass it on.

The US has seen cases and deaths rise despite the rapid rollout of vaccines. The US has seen a steady climb to 772,000 deaths from the 429,000 deaths Joe Biden inherited from President Trump on 20 January 2021. The European Union tops the world table for fatalities, now standing at more than 780,000. Brazil, with 608,000 deaths, and India (459,000) make up the big four. World deaths now total five million and cases 250 million. Within Europe, we see some of the highest death rates in the world, with Bulgaria at 3,599 per million, Bosnia at 3,601 and Hungary at 3,289.

  • 780,000 European Covid deaths
  • 772,000 US Covid deaths
  • 459,000 India Covid deaths

Europe on critical list

The World Health Organisation has recently stated that Europe is at a critical point in the pandemic, with all 53 countries in danger of a bad winter for cases and deaths. On the hotspots map over the last seven days, Slovenia and Georgia have the fastest growth rate in cases in Europe, with the Balkans and the Baltic states generally suffering. Austria, Ireland and Belgium also have high rates. The WHO advises more rules over social distancing and other precautions.

In China, the caseload is much lower and reported deaths have stayed well down as a proportion of the huge population. Because China follows a no-tolerance policy, small outbreaks lead to significant regional clampdowns.

Because China follows a no-tolerance policy, small outbreaks lead to significant regional clampdowns.

Currently, 19 provinces are in special measures to quash new viral attacks, including Beijing where the 6th Plenum will be convened by President Xi Jinping this week. Some of the reason for China’s weaker growth performance as the year has progressed has been the selective lockdowns of places and businesses as the authorities seek to stamp out the disease. When major container ports were affected, we saw a knock-on impact on world trade, as supply chains for others were damaged by shipping hold ups for Chinese exports.

It seems likely that the virus will be a negative influence on northern economies and on some sectors of the stock market over the winter. Some people on both sides of the Atlantic will be put off going to events or to hotels and hospitality by the spread of the disease, whatever the authorities do.

Some country and local governments will impose new restrictions, limiting numbers at venues, requiring vaccine certificates and/or test results before attending an event or function, requiring mask wearing and seeking to impose some social distancing. Employers may also permit or even encourage more home working as they assess their sickness risks, and some governments may issue guidance for more homeworking again. This disease seems to have some flu-like characteristics, including it being likely to spread more readily in colder weather or on darker days.

Complex pattern of changing rules

It is true that the US has just announced a relaxation of the bans on foreign visitors if they are double vaccinated to boost its tourism sector. This will assist the service sector recovery. In European countries, rules are often being reviewed and strengthened. In Belgium, rules have been tightened with vaccine passports needed for various activities, homeworking recommended and face masks required in public places. In Austria, use is made of vaccine passports with a ban on non-vaccinated people in cafes, restaurants and hairdressers.

This is all another complication for the central banks as they ponder how far to go in slowing economies by monetary tightening. They need to ask how much of a selective – but effective – slowing impact antivirus measures taken by people or required by governments will have on the outturn.

Covid-19 has just made stagflation a bit more likely as it induces lower growth to go alongside higher inflation.

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Covid casts further shadows over recovery

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