Firstly, a very Happy New Year to you all, I do hope you had the best Christmas possible, under what were very unusual circumstances.
As you doubtless know by now, I am something of an optimist and accordingly, I make no apology for sending a broadly positive missive less than 24 hours after we were once again plunged into a national lockdown.
There is little doubt that 2020 will go down in the history books as an extraordinary year. A deadly pandemic swept across the globe. Economies effectively shut down for an extended period to reduce the spread of the virus and limit the number of fatalities. That resulted in the largest decline in output since the Great Depression. However, while the first half of the year was punctuated by fear, that was quickly replaced by resilience and hope in the second half of the year. Resilience came from people rapidly adapting behaviours to the difficult circumstances, and hope from optimism that successful vaccines were being engineered. That hope was also founded on the rapid response of governments and central banks to both the medical and economic emergency.
While perhaps not always perfect in terms of timing and execution, the support from the state for households and businesses was essential in preventing the debilitating economic effects of bankruptcy and unemployment. Governments correctly recognised that the cause of the crisis was not household or corporate excess, but a temporary shock caused by taking measures to contain the virus, and otherwise healthy, well-functioning businesses needed to be supported; household income should not be negatively impacted where workers were forced to sacrifice wages to contain the pandemic. The use of these financial tools, supported by central banks reducing interest rates as far as possible and undertaking large-scale asset purchases, facilitated a rapid economic recovery in the second half of 2020.
In 2020 Q3 economies had recovered much of the decline in output over the preceding two quarters. Indeed, the bounce back in Q3 was better than almost all, forecasters were expecting. As economies began re-opening, pent-up demand was released with consumer retail goods purchases rising well above pre-COVID-19 levels and services recovering in sectors where restrictions were less stringent. Interest rate sensitive areas, such as housing also saw a rapid increase in demand, and even companies began to ramp up investment again.
While hugely encouraging, the initial rebound in activity could only be sustained if there was an effective vaccine widely available for use. In early November, several pharmaceutical companies announced the results of their trials show that showed the vaccines to be highly effective. The success of these vaccine trials and the prospect of mass production and distribution starting in late Q4 is the game changer that society had been hoping for. The 'COVID-19 vaccines' section below gives more detail on the next steps for vaccine distribution, but the hope now is for the majority of people in wealthier countries, as well as nearly all of the highly vulnerable sub-populations, to be vaccinated by the middle of 2021. The early and rapid roll-out of vaccines, alongside the high efficacy, is far better than anyone expected when the pandemic began. It dramatically reduces uncertainty about the outlook, allowing households and businesses to confidently plan for the future and draw down on some of the aggregate savings buffer accumulated in 2020. Moreover, it should raise demand expectations for businesses that have let inventories run down during the period of uncertainty, providing a further boost to near-term.
As a result, there appear to be a potent combination of economic drivers for 2021:
economies re-opening;
COVID-19 uncertainty largely removed;
pent-up demand for those activities forgone in 2020;
increased savings buffer to draw down; and 5) supportive monetary and fiscal policy.
The economists at AVIVA have raised their growth expectations across all the major economies for 2021. At the global level, they expect growth to be around 6.25 per cent in 2021, following a decline of around 4.25 per cent in 2020 (Figure 1). As a result, it is expected that the level of global activity will surpass the pre-COVID-19 level by the end of Q1 in 2021. A significant factor in that is the earlier and more rapid recovery in China. Amongst the major developed economies, the pre-COVID level of activity is expected to be reached by the end of 2021.
Source: Aviva Investors, Macrobond as at 3 December 2020
COVID-19 vaccines
We enter 2021 with three vaccines already having proven efficacy and with a very high probability of several more to come over the first quarter. Not only that, but the two mRNA vaccines, representing the absolute cutting edge of vaccine technology, have proven incredibly effective in reducing symptomatic infections.
It is true that questions remain regarding the details of the 70 per cent efficacy announced by the Oxford vaccine study. However, this study, with greater depth of volunteer examination, offers the first indication that not only can vaccines reduce illness, but just as significantly they may materially reduce the spread of the virus. So, whilst the roll-out of the Oxford vaccine may be delayed by the need for further trials, the lessons learned only increase the expectations that the current Phase Three trials will result in further effective vaccines being found. This is not to say that the crisis is over, but rather to highlight that, from a position of uncertainty as to how we may be able to navigate the crisis, we now enter the well-defined logistical challenges of producing sufficient doses and then inoculating populations at speed. Whilst this will require a monumental effort, it is not quite as large as it may first appear. It is far from clear what proportion of populations are likely to be vaccinated given the extreme variations with which different cohorts experience the virus.
However, whatever number that turns out to be, governments will not wait for all to be vaccinated before relaxing restrictions. Once the most vulnerable are protected, we should expect to see easing, even whilst younger age groups continue to receive a vaccine. In the developed world this means in many countries it is not unreasonable to expect to see normality return over the course of the second quarter. Outside of the developed world it is less clear, with production likely to take longer to reach several countries. On the positive side though, these nations have far lower proportions of their populations in the higher risk categories and so programmes can achieve much in their early stages. So, whilst logistics are challenging, the most material outstanding question is not delivery, but is one that we won’t have any clarity on for some time: the longevity of protection.
It will take some time before we see whether and how the efficacy of vaccines wanes over time. The evidence regarding natural infection is reassuring, with protection appearing to be long lasting for the vast majority. We will now have to wait and see the degree to which vaccines can match or even exceed this longevity. Whilst this uncertainty hangs over us, given the low level of mutation observed thus far, it is unlikely that the downside scenario is materially worse than the prospect of annual booster shots to revitalise population immunity levels.
As always, if you have any questions about this piece or any other finance related matter, please do not hesitate to get in touch.
Wishing you and all those you care about, all the very best for 2021.
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
