What the world’s vaccine rollout means for growth in Q2
Vaccine nations
The world’s current vaccination map is anything but consistent. Some countries made a flying start to vaccinating against COVID-19 and have now covered virtually their entire adult populations, as is the case in Israel or the UAE.1 Some developed countries – such as the US and the UK – have made impressive inroads, while others, notably in Europe, had a sluggish start but are now catching up amidst new waves of infection.
Other countries, such as Chile, have vaccinated strongly but are nevertheless experiencing new waves of infection.2 Some large countries, including Brazil and India, are struggling against new variants of COVID-19 and constraints on their vaccine supply.3 And then there are countries such as China, where vaccine stocks appear adequate but where there is lukewarm public appetite to get the jabs.4
This international patchwork of stories has complex implications for growth.
What the world’s vaccine rollout means for growth in Q2
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China’s resilience
Given China’s importance as a source of regional demand, its trajectory is critical to the wider Asian outlook. Its V-shaped recovery meant it finished 2020 with a GDP larger than just before the pandemic, uniquely among major economies. The SMEI, Standard Chartered’s proprietary index for China’s smaller enterprises, shows that growth momentum has picked up further since the beginning of 2021. This underpins our growth forecast of 8% for 2021, yielding two-year average growth (2020-21) of over 5% – close to the country’s potential growth range of 5-6% per year. In other words, we expect China to recoup almost all of 2020’s hit to growth over the course of this year.
Nevertheless, China’s rebound is uneven. The industrial sector shows signs of overheating, with capacity utilisation nearing maximum levels, but there is still slack in industries such as catering and hospitality. The housing sector has been an unintended beneficiary of huge stimulus, raising the possibility of a bubble. Moreover, pandemic-related stimulus boosted China’s debt-to-GDP ratio by 25 percentage points, to 280% as of end-2020, so the government is now likely to seek to taper its policy accommodation.
This tapering is most likely to take the form of a slowdown in credit growth rather than interest rate hikes over the next two years. Producer price inflation jumped from deflation to a positive reading of 4.4% in March, but we see limited pass-through to CPI, as China’s highly competitive consumer-goods market makes it difficult for producers to raise prices. In addition, pork prices are likely to fall further due to improving supply, and prices for services will likely remain subdued with the slow recovery of the services sector.
One additional factor to consider is Beijing’s strategic competition with the US. In terms of total economy size, China is on course to overtake the US by 2030, with the bilateral relationship likely to remain tense as this milestone approaches. China’s policymakers are likely to reserve policy space in order to be able to respond to any future economic shocks stemming from a deterioration in trans-Pacific ties.
A mixed picture in emerging markets
Southeast Asia
Although the region’s slow pace of vaccination (with the exception of Singapore) has negative implications for the post-COVID recovery, more positively, there is no synchronised global lockdown as there was in 2020. Export-reliant countries in the region are therefore receiving external support from a strong global trade recovery. For example, Singapore and Malaysia have strong manufacturing capacity in electronics and medical-related products, and their economies are benefiting from robust demand in these sectors. Large, domestically driven economies in Southeast Asia may be more impeded by any infection resurgence and slower-than-targeted vaccination rollout. Nevertheless, more targeted mobility restrictions, more experience in coping with the ongoing pandemic, and still-supportive stimulus measures should support the region’s economic recovery.
The Middle East and Africa
Higher oil prices are a positive for the Middle East, but price support relies substantially on OPEC production cuts. This is likely to limit near-term oil sector growth. To protect against future oil price shocks, reform momentum will continue to focus on economic diversification. Broadening the fiscal base by increasing non-oil revenue is a key part of this reform effort. Saudi Arabia tripled its VAT rate last year, and this April, Oman became the latest GCC economy to introduce VAT. While positive for the region’s medium-term resilience, these reforms may blunt the pace of the post-COVID consumption recovery.
More fundamental change has come to the Middle East. While the region has long been an exporter of capital to the rest of the world, a succession of oil shocks has necessitated greater external borrowing, bringing a surge in external debt issuance. Continued favourable market access will require continued economic reform.
In Sub-Saharan Africa, funding and logistical issues have limited meaningful vaccine rollout, despite the region’s younger demographics and natural growth advantages. This has delayed the normalisation of activity. Some estimates suggest that comprehensive inoculation (at least 60% of the region’s population) may not be achieved until 2024. This has significant consequences for the recovery in the region’s more tourism-dependent economies.
The multilateral response to the crisis in Sub-Saharan Africa has evolved. While emergency IMF financing at the outset of the crisis no doubt helped African economies deal with capital flow reversals, this borrowing will add to the region’s debt load. Over the medium term, Sub-Saharan African economies will face a concentration of external debt maturities. Market access and investor confidence should boost their ability to refinance this debt. However, initiatives such as the G20 Debt Service Suspension Initiative – and, where deeper debt treatment is required, the Common Framework – may have inadvertently discouraged private capital flows to the region, at least initially. The initial uncertainty is now receding as African countries stand to benefit from new IMF SDR allocations via a boost to their FX reserves.
Financing conditions aside, a more rapid multilateral response to the challenges of vaccine rollout is urgently needed. If a significant swathe of the world’s population remains unvaccinated, the risk of new variants emerging will increase. Even if the world’s current patchwork of vaccination is more positive for growth than last year’s synchronised standstill, longer-term COVID risks will abate only after vaccination has reached the world’s poorest populations.
Further US stimulus
The US – the other pole of global demand, alongside China – is also performing strongly. Standard Chartered expects the US economy to grow 6.5% this year, with much of that front-loaded in the first two quarters. Around 40% of the US population has now received at least one dose of COVID-19 vaccine, with 26% having received both doses.5 In March, the US economy added almost a million jobs and the CPI rose at the fastest pace in over eight years.6
However, the strength of the recovery poses a political risk to the Biden administration’s plans for further stimulus, which could cost as much as USD 4 trillion over the coming decade, on top of last year’s multi-trillion-dollar pandemic relief and the additional USD 1.9 trillion pandemic relief bill signed by President Biden in March.7 The already-strong recovery in the US economy may inflame congressional opposition to further spending on the proposed scale, particularly as it involves tax increases.
The growth situation in Europe is less encouraging. The EU’s vaccination rollout has been sluggish, with only 19% of the population having received at least one jab.8 However, the pace is now accelerating, with 70% of the EU adult population on track to be vaccinated by the end of July. This should mean that the onset of winter does not trigger another sharp escalation of cases and new lockdowns, lifting growth in the third quarter. Inflation is likely to pick up, but not enough to cause the ECB to hike rates.
1 https://www.cnbc.com/2021/04/21/uae-suggests-movement-restrictions-on-unvaccinated-people.html
4 https://www.nytimes.com/2021/04/06/world/asia/china-vaccination-drive.html?
5 https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution
6 https://www.cnbc.com/2021/04/14/fed-says-us-economic-activity-accelerated-to-a-moderate-pace.html
7 https://www.nytimes.com/2021/03/31/business/economy/biden-infrastructure-plan.html
8 https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution
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