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‘Traditional business cycle analysis doesn’t apply to the COVID shock.’
The light at the end of the COVID-19 tunnel grew brighter on Monday.
For the second time in as many weeks, Monday morning greeted investors with positive news on COVID vaccine development.
Early Monday, Moderna (MRNA) announced that its COVID-19 vaccine candidate had an efficacy rate of 94.5% in a Phase 3 trial of more than 30,000 volunteers, with just 11 severe COVID cases coming up among participants. All 11 severe cases were in the placebo group.
Now, like all concerned citizens, investors want to see a vaccine widely distributed to end the pandemic that has so far claimed more than 240,000 lives in the U.S.
But the prospect of a vaccine also asks urgent questions about how what a post-COVID economy will look like. And it’s not clear that anything we’ve learned from economic history will help us discern what may or may not happen next.
“Positive news on COVID vaccines gives us greater confidence that the economic restart can re-accelerate in 2021 — and that the cumulative activity loss from the virus shock will ultimately be a fraction of that seen after the global financial crisis,” said strategists at the BlackRock Investment Institute in a note published Monday.
The cumulative decline in GDP from the COVID-19 pandemic is expected to be just a fraction of what was lost after the financial crisis, according to work from strategists at BlackRock. (Source: BlackRock Investment Institute)
“Traditional business cycle analysis doesn’t apply to the COVID shock, in our view,” the firm adds.
“We see the latter as more akin to the shock of a natural disaster: With the vaccine news, we have even greater visibility on how the cumulative activity loss will likely be limited — just a fraction of that seen after the GFC in our estimate — even as we expect a renewed surge in infections and resulting restrictions to disrupt the restart in the near term.”
The stock market’s huge rally since March shows how investors are looking past the health emergency, and more clarity vaccine development should help buoy nervous markets through what is expected to be a grim winter for infections, hospitalizations, and COVID-related deaths.
Writing Monday just hours before Moderna announced its vaccine news, Neil Shearing at Capital Economics said, “Much will depend on the procurement and distribution of vaccines but, if all goes well, it’s possible that major economies will return to pre-virus levels of output around six months earlier than we had previously thought.”
Which would certainly be welcome news.
Though as the team at BlackRock flags in their outlook, a stronger and faster than expected rebound in the U.S. economy risks a “retrenching” in U.S. fiscal policy at a time when tens of millions of workers are receiving some form of unemployment assistance each week.
Leaving the economy and investors to try and make sense of an unprecedented split between what the next three months and the next six months are likely to have in store.
“There is an increasing dichotomy between the near- and medium-term outlooks for the economy,” Deutsche Bank economist Brett Ryan said in a note published Friday.
“On the one hand, economic disruptions from renewed virus growth will inevitably dampen the pace of economic improvement in the current quarter and into the beginning of next year. Ongoing political uncertainty about the next phase of fiscal stimulus could exacerbate this situation.
“On the other hand, better-than-expected vaccine developments and the potential for earlier deployment could provide a much-needed boost to the global economy next year.”
