Oliver Mangan: Waiting for vaccines is now the hardest part for economy and markets         

As noted by the ECB last week, and reflected in data for recent months, containment measures are mainly hitting the services sector of economies. 
Oliver Mangan: Waiting for vaccines is now the hardest part for economy and markets         

It is likely to take until the second half of the year before vaccines become widely available.

Markets have been very much in consolidation mode in recent weeks despite the sharp rise in the number of new coronavirus cases and Covid-19-related deaths in the past month. 

There have been new lockdowns and other restrictions imposed in many countries, and — although the rollout is obviously very welcome — it is likely to take until the second half of the year before vaccines become widely available.

While lockdowns may end around Easter, it could be the middle of the year before there is a broad-based lifting of many restrictions. 

That means economic growth is likely to be weak in the first half of 2021, especially during the first quarter, in many countries. 

Markets expect that this will be followed by a strong rebound in activity in the second half of the year and into 2022. 

These hopes are helping to keep markets calm.

As noted by the ECB last week, and reflected in data for recent months, containment measures are mainly hitting the services sector of economies. 

However, activity held up better than expected in the fourth quarter of last year, despite the reimposition of restrictions on activity during this period. 

It now seems likely that GDP rose modestly in the US and UK in the fourth quarter and there was only a moderate fall in output in the eurozone.

Falls in GDP, though, are likely in many economies in the first quarter of this year, with lockdowns lasting for most, if not all, of the period. 

However, falls in output are likely to be modest compared to last spring, with construction and manufacturing generally remaining opening and some services now better able to cope with containment measures via remote working and online sales. 

Meanwhile, some other service businesses have either not reopened, or were operating well below normal capacity before the latest containment measures were introduced.

Despite this weakening of activity, the ECB, Bank of Japan, and Bank of Canada didn't respond with new measures last week amid expectations that brighter days lie ahead for their economies as vaccines become more widely available. 

The ECB said it still forecasts growth of around 4% in both 2021 and 2022. 

The latest Irish Central Bank forecasts, which were published last Friday, are for growth here to grow by 3.8% in 2021, and 4.6% in 2022. 

Therefore, after a weak first half to the year, many central banks see growth picking up considerable momentum in the latter part of 2021 and into 2022. 

In this regard, Bank of England governor Andrew Bailey noted the darkest hour is before the dawn. He did acknowledge, however, that the UK economy was currently in a very dark spot, as he said better days lie ahead.

Central bankers probably know that they are at the outer bounds in terms of what they can do in monetary policy. It seems unlikely that additional monetary easing would impact activity that much. 

Fiscal stimulus can still boost growth, but the real key to economic recovery is a successful roll-out of effective vaccines.

The waiting is the hardest part and there are also risks in terms of the sheer logistical challenges, possible resistance to new virus strains, the extent of the reluctance in some countries to take a vaccine, and uncertainty about how long immunity will last.

Policymakers and markets, though, are putting their trust in the belief that the vaccines will triumph over the virus. This is the great hope for 2021.

  • Oliver Mangan is chief economist at AIB

More in this section

IE_logo_newsletters

Select your favourite newsletters and get the best of Irish Examiner delivered to your inbox

LOTTO RESULTS

Saturday, December 4, 2021

  • 7
  • 10
  • 26
  • 27
  • 35
  • 43
  • 12

Full Lotto draw results »