Macro Bytes: Will Delta derail the economic recovery?
Transcript:
Paul 00:06
Hello and welcome to Macro Bytes the economics and politics podcast from abrdn. My name is Paul Diggle and along with my co-host Stephanie Kelly, we're guiding you through the macroeconomic and political themes which are driving global markets. And today we're talking about the Delta variant and what it means for the course of the global economic recovery out of the pandemic. The start of a potential fourth global COVID wave driven by this new Delta variant is certainly challenging our relatively upbeat set of global macroeconomic forecasts and it's worrying financial markets. Indeed, Delta has taken over from inflation as the biggest topic of conversation in markets right now. With vaccines breaking the link between cases and deaths from COVID, at least where vaccine rollouts have occurred, does Delta or indeed any future variant really pose a threat to the global economic recovery? So joining me in this discussion are James McCann, Deputy Chief Economist at abrdn and head of our US forecasting and Ed Glossop, Emerging Market Economist and a deep specialist in Latin America. James, Ed, welcome back to the podcast. So we're talking this week about the threat to the economic recovery from the Delta variant. But first, tell us, James, from your vantage point in Boston in the US, Ed in London, are you seeing behaviours, official restrictions change at all in response to the Delta variant? Are you changing your behaviour?
James 01:41
Thanks, Paul. We're not seeing any change in official restrictions over here in Boston or Massachusetts more generally, even though cases are rising quite steeply. I think from a personal behaviour standpoint there's a touch of confusion about what to do with regard to masks. Obviously, the CDC has changed its guidance around vaccinated people on whether they should wear masks indoors. So I think at the moment, people are taking more into their own hands and trying to judge that public health risk. But really, it's a little bit unhelpful, we're getting mixed signals around where you should wear a mask when you shouldn't, etc.
Paul 02:14
Ed what are you seeing in London?
Ed 02:15
Hi. Yes, so similar to James, really, I would say there's generally limited concern about the Delta variant, at least from my vantage point in west London. Of course, all restrictions in the UK have been lifted. My wife's taken our seven month old to all of her baby classes, we've been to a few normal weddings, Parkrun's back on. So it's very much as normal. I think the general feeling is that the higher vaccination coverage make people feel relatively confident, even though cases are clearly rising around us.
Paul 02:44
Great. So let's get into the proper discussion, then taking all those points into account. So we're going to start by reviewing the current situation in terms of the spread of the Delta variant in some of the major global economies that we cover, and I'll start with Europe and the UK. And as you say, there Ed we're, of course, seeing a pretty large wave in the UK, driven by the Delta variant, but that may have peaked already. And I think here the real puzzle is, is that renewed decline in cases after the recent peak, going to be sustained? Have we achieved some kind of herd immunity from vaccine rollout? Or could it be that actually schools closing for the summer, the end of the euro football competition, the better weather here in the UK, and the fact that that a lot of people are being forced into isolation by the COVID app is what's doing a lot of the work in terms of pushing case numbers down. And I think trends are pretty similar in Europe as well, with a bit of a lag. So a big Delta wave has been occurring. But the crucial development is that in widely-vaccinated Europe, the link between cases and deaths has really been weakened. And we're going to get into how that might change the economic outlook. James, what's the Delta situation in the US then? In particular, how is it playing out differently in different states of the US?
James 04:11
Yeah, I think perhaps Delta is even earlier in Europe in a way. We're seeing Delta over recent weeks become the dominant strain here. At the national level, we're seeing cases rise quite steeply. But your point is absolutely right. It differs enormously depending on where you sit in the country. I guess the most well publicised hotspot is Florida at the moment, which accounts for almost 20% of nationwide cases, cases per capita are running around three times the national average there but when we look across the south, so Louisiana, Alabama, Mississippi, certainly receive very troubling rises in new COVID cases. And I think really, when we look at the vaccine coverage, this is where some of those differences start to creep in as well. So we've just hit 70% of all adults have had their first dose across the country as a whole. But when we break it down actually, there's quite significant differences in state level vaccinations. Interestingly, Florida is not one of the worst performers in terms of state level vaccinations, it's close to the middle, so around 70% of adults. But if we cut within the state, we can see some very, very low vaccine coverage in parts of that state. So a minimum of 28% in certain counties. In other parts of the south, there's even deeper problems with vaccine coverage. So Louisiana, for instance, only 54% of adults statewide have had at least one dose. And again, when we look at the worst performing counties in that state, you're down to 16%. So I guess the real concern is you've got areas of very, very low vaccine coverage, and it feels like certainly there's a link or correlation between where we see higher Delta spread and those areas where the vaccine has taken less of a hold.
Paul 05:55
So yeah, really important to highlight the divergence story within the US. And what about emerging markets, then? So a lot of focus at the moment is on EM Asia, where previous handling of the pandemic had been extremely strong in terms of suppressing case numbers. But those economies seem to be relatively worse performers now during the Delta wave. What's going on there?
Ed 06:18
Yeah, exactly. I think that, as you say, Paul, that is perhaps the most intriguing development from the Delta wave, at least from an EM standpoint. We've had a jump in cases in the likes of China, Korea, and Vietnam, but also smaller nations like Cambodia, where, as you say, these countries, particularly China, earned the plaudits last year for their zero tolerance approach to COVID, having quashed various outbreaks with impressive efficiency. But now that Delta appears to be spreading widely in terms of geography within these countries. So for example, in China, about half of its thirty two provinces, have now reported cases. So it's very,very geographically widespread. There's kind of local transmission in China now. And so, the spread of Delta is really putting this zero COVID tactic under renewed scrutiny. Just a few words on other other EMs. So we've we've seen also large increase in cases in the likes of Mexico, South Africa and Russia. But as you say, most of the talk is about Asia. Asia is now the epicentre, particularly Indonesia suffered a huge rise in cases. Cases are at a similar level to Brazil now. It's taken over from India as the epicentre. There's reportedly lack of oxygen now. They're importing oxygen tanks from elsewhere. Hospitals are becoming overwhelmed in Malaysia and Thailand. So the outbreak there is quite severe.
Paul 07:56
And in those those EM Asia countries, at least ex-China, Ed, the defining sort of driver of the renewed outbreak is, it seems, low vaccination rates. And likewise, James in the States that you are highlighting as having particular problems, it's to do with low vaccination rates. What's behind these low vaccination rates? James in the US, why are there these huge state level differences?
James 08:24
Well, I think one area that seems clear, and there's been a lot of work done on this to try and map some political preferences. If we do try and break down vaccination coverage across county - by how those counties voted, we do tend to see higher vaccination rates in Democrat areas as opposed to Republican areas. I think the other point, which is maybe slightly underplayed is vaccine access. You know, for many of us, it seems that vaccine access is very, very easy. In Boston, you can't throw a stick without hitting a vaccination station. But for many groups, there are real concerns about getting vaccinated, be around their immigration status, be around the cost of the vaccine, even though it's supposed to be free for everyone there are still concerns over whether it's it's charged. Be it around, getting time off to go to that vaccine station, etc. So I think that there's a little bit of a holdout where vaccine hesitancy overlaps with some broader concerns. And we see that more and more closely concentrated in republican areas. But as well, I think that vaccine access issue is still something which is yet to be overcome, and is a major policy priority for the administration across the country.
Paul 09:34
Yeah, a complex nexus of sort of socioeconomic, political, institutional factors at play there. Ed what about in EMs where vaccine rollout has been more lagging? Is that a question of access and supply? Is it to do with previous success in virus handling and some of these economies sort of embedding some complacency? What's going on?
Ed 09:58
Exactly. I think it's both of those things you just highlighted. It's a lack of supply. And related to that some complacency. You know, they did so well last year, that countries, thinking of Taiwan, Thailand, Vietnam, these countries did so well last year in quashing the virus that they didn't really get their act together to push through agreements, supply agreements, at an early stage, and now they're at the back of the queue really. I think there's also potentially a trust issue with some governments as to the efficacy of some of the vaccines, particularly in some cases, where, for example, Indonesia relies farily heavily on China's vaccines, which I'm sure we'll perhaps talk about a bit later. But then there's a there's an issue there as to whether people trust the efficacy of those vaccines too.
Paul 10:48
Right. So I think, when we get on to thinking about the economic implications of all this, the two factors that we think really drive, how much Delta is going to affect the course of economic recovery are, of course, vaccine rollout and levels of vaccine penetration, which we've seen that where vaccines are widespread in the population that breaks the link between cases and hospitalizations and deaths. There's clear evidence of that in the UK's wave. But I think you see the same in the US in Europe, in Israel. But the second factor is the actual strategy that individual countries are pursuing vis-a-vis, the control of the pandemic. So last year, the most successful countries in terms of the pandemic handling were those that have pursued zero COVID strategies that really tried to suppress overall case numbers in the population. And they were able to normalise more rapidly. I'm thinking of New Zealand as the sort of standout example, but China also proved a very good example of that. This year, the advent of widespread vaccine roll out, and the more infectious Delta variant actually flip that equation completely on its head. So it means that those countries pursuing the zero COVID strategies have to work all the harder to clamp down on an even more infectious variant, while those countries sort of targeting hospitalizations and deaths and allowing some degree of community transmission of cases. That strategy becomes somewhat easier, or at least less economically damaging in the presence of vaccines which break the link between cases and hospitalizations, and deaths. So that I think once you start thinking, about putting countries on a sort of map that on one axis plots, vaccine penetration and on the other axis plots, the COVID handling strategy, we can start to get a good handle on how countries are going to perform. So in the sort of top right quadrant of this imaginary mapping are those with very high vaccine penetration and CovidOr strategies that actually accept quite high levels of case numbers, but try to suppress hospitalizations and deaths. And James, the US is a very good example of such a country. Does that mean that you're actually not particularly worried about the impact of the Delta variant on the course of the economic recovery? O do some of these regional differences you've been highlighting mean that that view is too complacent?
James 13:26
I think this is something we need to monitor really, really closely. But for the time being, I don't think I'm looking to radically alter my growth outlook based on this. You know, a few reasons for that. One that you've highlighted, I think, well, there is that, at least in the US weaker translation between new cases and deaths. We've seen deaths increase, but by no means what we've seen during previous waves so far, which is a really encouraging sign. And the second point, I think, is quite interesting around the state level responses. And what we do tend to see is that in many of those states, in which we're seeing worsening trends alongside poorer vaccination rates, we have seen less reluctance in those states to take punitive and aggressive action to try and lock down against the virus. So certainly during the summer wave last year, and even through the holiday wave at the turn of this year, we saw those states suffer quite significant outbreaks, but not take very aggressive public health responses and allow a greater degree of community translation of the virus. So for the time being, it seems that that impact should be relatively localised and relatively muted even at those localised areas. But, you know, we just need to be so alert to this and just watch the case levels, watch the the breadth of those increases just for signs, that that's too complacent and that actually, you know, this will be much more disruptive.
Paul 14:50
Great. So the US and you'd probably also put the UK and parts of Europe in that grouping of high vaccine, high case tolerance economies that may perform better during the Delta wave, albeit with these very important risks that you highlight James. So the countries that would then be at the opposite end of the spectrum in the low vaccine rollout, low case tolerance quadrant, are the likes of Australia, perhaps South Korea, perhaps Japan. And I think there are reasons to think that those economies are actually the most vulnerable economically to the Delta wave because they require a sustained period of tougher internal and external restrictions to maintain their zero COVID strategies, even while immunity in the population is pretty low, because of the fairly low levels of vaccine penetration. So if Delta got a foothold, you probably see much larger spread. Ed, it's interesting where EMs then sit in this mapping, because a lot of them are in the low vaccine, high case tolerance quadrant. So I'm thinking Brazil, South Africa, India, Indonesia, Turkey, a lot of those you've highlighted. Are we negative on the macro outlook in those economies as Delta takes hold? Or do you think that with vaccine rollout increasing so rapidly you can be more positive on the economic outlook there?
Ed 16:25
Yeah, they're good points you raise Paul. I guess, in short, yes, we are worried about longer duration shocks in most of those economies, you mentioned - Brazil, South Africa, India. And we are factoring in, as things stand, long-term damage into our long- term economic projections. I know you're close to publishing a paper on long-term economic scarring as well, Paul, so look out for that. You know, these countries are essentially dangerous to this feedback loop in which cases come down, or restrictions are then eased prematurely, causing cases to rise again, and restrictions to be re- imposed against the backdrop of low vaccination. This feedback loop could have major impacts on investment by uncertainty, as well as labour markets. You know, many of these countries also don't have the fiscal resources to supplement private sector incomes, or help to preserve labour market matches. There are a couple of kind of nuanced points that I wanted to bring out about this grouping, I suppose. So one is to kind of distinguish between the likes of South Africa, India and Indonesia, where less than 5% of the population are fully vaccinated. That's incredibly low. And that's certainly in contrast to places like Brazil and Turkey, where, although vaccination coverage is still low by DM standards, they have managed to vaccinate the most vulnerable and elderly. So this helps to explain why, although cases in Brazil, for example, remain very high, the link between cases and deaths has weakened, which has eased healthcare pressures. And the kind of second nuance is that countries can and have ramped up vaccination very quickly. So for example, while overall vaccination coverage is still very low, in much of Asia, run rates in Malaysia and Taiwan, for example, have surged over the past few weeks. And policymakers are now on course to vaccinate 75% of the population by Q4. Previous trends were pointing to mid 2022. So these things can change very quickly. So it is important to keep on top of the latest run rates. And obviously we'll do that in our regular publications.
Paul 18:47
And how are you thinking Ed about the rollout of vaccines from China to these EM economies? We've done previous episodes of the podcast about vaccine diplomacy and how China in particular is very successfully using vaccine supply as a sort of tool of foreign policy, and with vaccination rates reaching now very impressively high levels in China, does that actually increase the supply of vaccines to the rest of the emerging world?
Ed 19:21
Yes, Paul, I think there will be a large amount of supply from China coming on stream very soon. China has vaccinated extremely rapidly, probably will reach 70 to 75% thresholds by perhaps even later this quarter. So I think supply will come on stream from China. The key issue actually is whether there will be demand for the China vaccines against the backdrop of, you know, concerns about their efficacy against the original strains, let alone the Delta strain. We have very limited visibility about how effective the China vaccines will be against that strain.
Paul 20:00
And how are you thinking that about the Chinese economy itself? So it's probably in a fourth quadrant we haven't talked about yet, which is the high vaccine, but low case tolerance, sort of grouping. So very successful vaccine rollout there. But China is still during this Delta wave pursuing a zero COVID strategy. Still doing enormous scale mass testing of the entire population of provinces to really stamp down on case numbers. What does that mean for economic vulnerability or otherwise to this next global wave? And is some of that driving weaker H1 growth that we've seen in China as well as the outlook from here?
Ed 20:43
Yeah, that's absolutely true. I mean, as you say, China is in this slightly odd position, I suppose, with high vaccination, but still low case tolerance. And as you alluded to Paul there, there is evidence in China's recently released GDP data for Q1 and Q2, that its zero tolerance approach probably contributed to a weak H1 for the economy. And, you know, given the tightening of restrictions, recently, it probably also contributed to a weak start to Q3 as well. Just to give an example, China has banned all indoor mixing and closed shopping malls, in one provincial capital with about the same population as London after just one confirmed case. And did something similar when it found about two or three asymptomatic cases. So it's very, very aggressive approach, which obviously has direct impacts on activity by the cessation of economic activity, also indirect impacts by business uncertainty and things. One other point I would make is that it's clear that the recent outbreak in China underscores that this zero COVID approach maybe unsustainable. But perhaps the other point is that there's a question about if China does not, does not move away from zero COVID, as other countries in the region have done like Singapore, perhaps that says something about its trust in its own vaccines, which would obviously have very negative implications for other EMs that are relying on China's vaccines, such as Chile, Peru, Indonesia, Turkey, Brazil,
Paul 22:23
Brilliant. James, that's a really useful discussion, I think of the ways in which this wave of the pandemic, coming alongside widespread vaccine rollout, at least in parts of the world, changes somewhat how we view the combination of COVID handling strategy, vaccine roll out, and how all that plays into the macro recovery. And it sort of changes the nature of who actually performs better and who performs worse, relative to some of the patterns we saw in 2020. I think our global view is probably still that we are in recovery. It's very hard for the world economy to do anything other than recover at this stage, given how far it still is below pre-pandemic levels. But divergence as we've been talking about is an absolutely central theme. Within that recovery, investors need to be very clear on who can negotiate the next stage of the pandemic more or less successfully. But that's about all we have time for this week. Thank you for listening to the podcast. Don't forget to like or subscribe on your podcast platform. We're on Apple podcasts, Spotify, SoundCloud, Google podcasts, wherever you get your podcasts from. Until next time, goodbye and good luck out there.
Voice-over 23:47
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