The timing could hardly have been better. In the week that the daily number of US Covid-19 cases relentlessly hit new records and just days after England followed much of the rest of Europe into lockdown, Pfizer and BioNTech announced their vaccine was 90% effective against the virus.
The news came too late to prevent a new hit to growth in the final three months of 2020. Nor will it be enough to prevent the central banks in the US and the eurozone from piling in with fresh stimulus packages in the weeks to come.
But hopes of a treatment for the virus that has caused such damage to the global economy this year does boost confidence that better times are ahead in 2021.
Moreover, it – and further announcements to come – increase the chance that there will be upward revisions to growth forecasts in the months ahead. Anthony Fauci, America’s top infectious disease expert, says he expects more good news to come from Moderna’s stage 3 trial within the next few days.
Financial markets were certainly in no doubt that there was finally light at the end of the long Covid-19 tunnel. Shares in companies most affected by social distancing – airlines, cinemas, brewers, hotels – all soared in a powerful vaccine rally.
Hande Küçük, deputy director of macroeconomic modelling and forecasting at the National Institute for Economic and Social Research (NIESR), said: “The economic impact of of Covid-19 not only comes from lockdowns and restrictions but from voluntary social distancing. If vaccines reduce the fear of being infected it might have a big impact on the recovery.”
Küçük added that NIESR’s forecast of 5.9% UK growth in 2021 had assumed that vaccines would become available from the middle of next year, but she said there was now a possibility of “a quicker recovery in the first and second quarters.”
Ben May, global economy analyst at Oxford Economics, said the vaccine was a “major step forward” which should help limit the long-term scarring to the economy by persuading policymakers to continue with plans that would prevent lay offs and bankruptcies.
While not yet ready to revise his forecasts, May said he didn’t rule out the possibility of doing so eventually. “There would need to be evidence that vaccines were going to be in circulation very quickly and give governments the ability to reduce restrictions very quickly.”
He added that the stock market reaction was understandable. “News on vaccines provides hope to people in these sectors that if they are patient they will have a viable business model again.”
New data released last week showed that, after declining in the first and second quarters of 2020, the UK economy grew by a record 15.5% between July and September. But the pace of activity slowed even before the latest restrictions to combat the virus were imposed. Most forecasts expect the economy to contract again in the fourth quarter and to shrink by around 11% in 2020 overall.
Thomas Pugh, UK economist at Capital Economics, said the outlook for next year was now more encouraging: “We have pencilled in a [growth] hit of 8% in November. That would result in a 3.5% contraction in the fourth quarter. But the recent news of a potentially effective vaccine means that the outlook beyond the next six months could be much rosier than we have previously anticipated.”
Policymakers tended to be more cautious, in part because their own growth forecasts have already assumed that the efforts to find a vaccine would be successful before too long.
In its half-yearly World Economic Outlook in October, the International Monetary Fund said it expected global growth of 5.2% next year on the assumption that social distancing would continue into 2021 but would then fade over time as vaccine coverage expanded.
However, the IMF added that a speedier recovery was possible. “Progress with vaccines and treatments, as well as changes in the workplace and by consumers to reduce transmission, may allow activity to return more rapidly to pre-pandemic levels than currently projected, without triggering repeated waves of infection.”
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Speaking after the Pfizer-BioNTech announcement, Jerome Powell, the chairman of the Federal Reserve, said it was “just too soon” to assess the impact of the vaccine but that more US economic support was still needed. Christine Lagarde, the president of the European Central Bank, also downplayed the possibility of an immediate upward revision to eurozone forecasts.
Andrew Bailey, the governor of the Bank of England, told a Financial Times event that the vaccine news was encouraging and chimed with Threadneedle Street’s view that there would be a gradual improvement in the economy as treatments for the virus improved.
But he also urged caution: “I think we have to be cautious because there’s still quite a way to go in trialling [a vaccine], in production and distribution, and putting all this into action.”
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