COVID: An Uneven – and Unequal – Recovery

Topic: Human Interest

Fergus W. Gould CFA

July 6, 2021

Image used with permission: iStock/style-photography


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COVID: An Uneven – and Unequal – Recovery

Canadians have had enough of the lockdown. Here we are 18 months after you first heard of the then mysterious Wuhan flu. Today, but for any curve balls from the variants, normalization is finally underway and the path to recovery is visible. For most, there has been some hardship and, for some, tragedy.

We are still coming to grips with all the health facets of COVID – a more precise understanding of the effects on the “long-haulers” and the unsettling evidence that, for some at least, this virus seems to shrink parts of the brain with as yet unknown consequences.(1)

As widespread as the human and health impacts have been, this article focuses on some of the economic aspects of the recovery. Of course, economic growth has meaningful implications for humans and health. Economic growth directly affects our standard of living – especially so in the lesser-developed parts of the world – and helps with innovations of all kinds that make life better for us all.

Today, for countries such as China and New Zealand, the economic recovery is essentially complete, thanks to severe and successful lockdowns and isolation, even if vaccination progress is relatively low. The U.S. is now in full blown recovery. Thanks to vaccinations and government stimulus, the World Bank bumped its forecast for 2021 U.S. economic growth to 6.8% from the 3.5% that was estimated in January, even though the U.S. lockdown was less stringent than others.(2) Some countries, like Canada and many within the European Union, may be “set to pop”. These countries have had more severe lockdowns than the U.S. and are now vaccinating at a torrid pace. Typically, the more severe the lockdown, the larger the economic recovery gap, with vaccinations providing the rocket fuel. Vaccinations help economic growth in at least two ways. First, by lifting restrictions on social activity, typical economic activity will return. Please… who doesn’t want to sit down in a restaurant, go to the ball game, and travel on vacation? Second, by reducing the risk of future outbreaks, businesses and consumers are more confident about the outlook, so growth is more assured and more resilient as a result.

But there is a tale of two paths ahead. Simply put, the developed world has a multi-lane freeway and the developing world has an uneven track. The developed world has the vaccination vials, the distribution system, the refrigerators, and the healthcare staff. The developing world, … not so much. And it shows. The World Bank forecast estimates the 10 highest vaccination economies will grow 5.5% in 2021 on average, which is way higher than the norm for the developed world. The 10 lowest vaccination countries – typically the poorest – are set to grow only 2.5% this year. For the poorest 29 economies in the world, only 0.3% of the population has received at least one dose of a vaccine. For these countries, 2020 and 2021 will be the lowest growth they have experienced in at least 20 years. Some of these countries will reach herd immunity mainly by way of infections, not vaccinations. India may get there in early 2022.

All the developed world’s government-provided stimulus is driving up prices and speculative activity. If this trend persists, it may be inflationary, rather than only a normalization blip, and lead to higher interest rates. Ironically, this would be hitting developing countries below the belt. Typically, when interest rates rise in the developed world, money drains out of emerging market economies towards the developed countries. In response, the developing world is forced to raise interest rates. As is the case in this instance, this could occur before these economies have made a proper recovery. Brazil and Russia have already been forced to raise interest rates, with Russia directly pointing the finger of blame at the loose monetary and fiscal policies among the world’s major economies.

Apart from exacerbating have- and have-not country inequalities and the human implications, on the economic side for North American investors, what goes around comes around. The developing world is now more developed and provides a meaningful assist to global economic growth, to the profits of developed world companies, and hence to the health of their own economies and stock markets. For many reasons, let’s hope for more evenness amongst the uneven.

(1) A U.K. study suggests there could be long-term consequences from COVID: https://www.medrxiv.org/content/10.1101/2021.06.11.21258690v1.full.pdf

(2) The statistics and the theme of this article comes from The jabs and the jab-nots, The Economist, June 19, 2021.

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