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Why the threat posed by Covid-19 to the global economy is not over

The failure to vaccinate much of the world and the danger posed by new mutations will continue to depress growth.

By James Meadway

At the start of 2021, the economic prospects for the Anglo-American world were widely assumed to be rather bleak: both the US and the UK had experienced some of the highest Covid-19 infection rates and suffered among the worst economic hits. Yet just a few months into the year, the IMF has revised its forecasts, predicting the most rapid US economic growth since the 1960s, rising to 6.4 per cent this year. And in the UK there are discussions about just how big the economic rebound will be, with the Bank of England expecting record rates of growth over this year, which could rise even higher if households spend more of the estimated £180bn in savings they have accrued over the course of the pandemic.

It is reasonable to expect a rapid recovery as lockdown restrictions are eased. We know from last year that the economic bounceback can be significant. The dramatic success of the vaccine roll-out in both the US and the UK removes a major part of the risks and costs – both human and monetary – of the virus itself. But once the summer fades, the situation is likely to look significantly less rosy, and in ways that will have substantial long-run implications for economic growth.

In the early stages of the pandemic, many economists tended towards the view that Covid-19 would be a one-off shock, with demand and economic activity crushed by social distancing and lockdowns in the short-run, but recovering quickly afterwards. The pandemic would be painful and destructive, but, in economic terms, it would be short lived, with no serious long-term consequences – equivalent to turning a light off and then on again.

This optimism contrasted starkly with epidemiological modelling, which pointed towards the chronic persistence of Covid-19, even after the arrival of effective vaccines. The disjuncture between the two disciplines, and the advice each gave governments, no doubt contributed to the confusion seen in the UK last summer, where public health officials and experts warned of the dangers of second (or more) waves of the virus, while the Treasury pushed forward the “Eat Out to Help Out” scheme, which increased Covid infections by up to 17 per cent.

Once the sugar-rush of unlocking subsides, we will approach autumn in a world where the virus is still circulating widely across the globe, and domestic cases – according to Sage’s own modelling – are increasing. Whatever temporary high can be achieved from easing lockdown and increasing government spending – the main grounds for optimistic forecasts about the US recovery – it is unlikely to be sustainable in a world where global growth remains rocky and the costs of security against the virus have risen sharply. 

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[see also: “This crisis has been the polar opposite of the last crisis”: UK Finance’s chair on post-Covid economics]

Olivier Blanchard, the former IMF chief economist, and Jean Pisani-Ferry, a former adviser to Emmanuel Macron, have warned of a post-vaccine risk phase, in which the dangers of mutations are at their most acute. The vaccine is not a magic wand: the jabs we have all reduce the risks of serious illness or death very substantially, and the early, unconfirmed, evidence is that they significantly reduce transmission. But this isn’t the same as eliminating the virus, and as more pressure is applied to the virus’s habitat, with social distancing and rising immunity reducing the ability of current strains to multiply, the likelihood of vaccine-dodging mutations emerging and spreading increases. Since delays to the vaccine roll-out – as Europe is now experiencing and as much of the world is forecast to suffer – can increase the likelihood of vaccine-resistant strains spreading into the wider population, speed is essential, closing down as rapidly as possible the environmental space in which new mutations can spread.

What we face globally is a monumental coordination problem, requiring the continual development, production and distribution of vaccines effective against strains of the virus in circulation. What we have built globally is an economy that is spectacularly bad at solving repeated and costly coordination problems. The predominance of private property rights over knowledge means competing national governments do not magically ensure the efficient supply of global public goods such as worldwide vaccination.

The distinct likelihood that much of the world will remain unvaccinated for the foreseeable future should temper any economic optimism. In places such as Australia and New Zealand, protected corridors for travel are used between countries deemed to be “safe”, but tight border controls remain for the rest. Israel, hailed as a vaccine success story, is keeping tougher border restrictions firmly in place.

But we have a global economy built around international travel and trade. Goods trade should be the least disrupted, but tourism incomes, accounting for $1.7trn globally, fell by 74 per cent last year, and the intangible impact of limited person-to-person contacts will, as Blanchard and Pisani-Ferry point out, drag productivity growth downwards.

Add to this the danger of outbreaks in specific regions, as the sudden surge of the 501Y.V2 variant in south London demonstrates, and the risk of repeated lockdowns and social distancing across the globe begins to mount. The expense of monitoring for outbreaks, repeated vaccinations and upgrading healthcare systems will be dramatic. The likely consequence is a continuing need for government support to sustain economic activity, from subsidising biosurveillance to active support for industries.

We are moving into a world where the environment is no longer something that can be managed, controlled and suppressed – as conventional economics and policymaking assumes, treating it as an “externality” to economic activity. It is, instead, a dangerous and volatile new factor in all our lives, with Covid-19 the first truly global environmental crisis. We will not escape it anytime soon and, as climate change accelerates, it is likely to be the first of many.

[see also: Why we must build a new civic covenant]

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