Oliver Mangan: Markets can smell the potential for strong recovery driven by the Covid-19 vaccine

Mon, 16 Nov, 2020 - 12:45

Economic forecasting this year has been like trying to shoot a fast-moving target and even forecasts published just over a month ago by the IMF and the Organisation for Economic Cooperation and Development have been overtaken by events as a second wave of the virus takes hold.

This means the economic recovery has been stopped in its tracks, with many countries now looking at a double-dip recession in the current quarter. The virus is also proving persistent, which means the economic restrictions are likely to extend well into next year.

As a result, growth forecasts for 2020 and 2021 are being revised down: The Bank of England recently forecast the UK will slump by 11% this year, and the economic rebound there will be pegged back to 7.25% in 2021.

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Developments though could change the outlook. Pfizer and BioNTech last week and, this week, Moderna Inc have developed what may be highly effective vaccines, although it is likely to be mid-2021 at best before it becomes widely available.

There are questions about the vaccines: Will it be effective for the most vulnerable groups of the population, in particular, the elderly, how long will immunity last, and will other companies be able to produce a successful vaccine, to boost supplies?

But despite these uncertainties, stock markets see the vaccine as very positive for the world economy. It should allow restrictions to be lifted more quickly over the course of 2021, helping a strong sustained recovery to take root.

However, it still needs to be borne in mind that this has been a deep and severe recession, which is likely to leave scarring effects and accelerate changes that may inhibit the recovery. Scarring effects include rising numbers of business failures and bad debts, permanent job losses and lower labour-force participation rates, inefficient uses of resources as well as long-term damage to confidence.

Changes that will weigh on parts of the economy include a shift to remote working, lower levels of international trade and travel, as well as a fall-off in in-store shopping. There have been casualties already and more are likely, with some sectors likely to take years to recover from the collapse in demand they have experienced in 2020.

Thus, central banks will keep monetary policy very accommodative, though a successful vaccine reduces the chances of further rate cuts next year.

Meantime, governments will also need to maintain supports for businesses and households through a very challenging winter. However, the news of a vaccine means there is now increased confidence about the recovery. Markets can smell it, even if it still some time off.