Financial and health imperative will be to invest in vaccinating the entire world
The northern hemisphere is sweating through a second long summer of Covid-19. As the Delta variant gains ground in the US, Europe and even China, the contours of the global economic challenge are now clear.
Libertarians and statists should lay down their arms, since there is no fundamental trade-off between lives and livelihoods. Through different strategies, the countries that have best controlled the virus have generally enjoyed greater freedom and better economic performance over the past 18 months.
Emerging data from the second quarter shows how China and South Korea, both of which originally opted for harsh lockdowns, have comfortably exceeded their pre-pandemic peak levels of output, unlike large European countries. They were also able to relax restrictions more than places where the virus was much more prevalent.
Almost as important as keeping a lid on infections has been compensating those hit financially by Covid-19. Practically no level of economic support has been too much.
Advanced economies quickly understood this feature of the pandemic. Emerging and developing countries did not have the same scope for extremely cheap borrowing. The US performed better than Europe on this front, although tourism-dependent economies such as Spain and Greece could have done little more.
Errors made by countries in the crisis phase of the pandemic or in cyclical management of the recovery can largely be rectified in years to come. Divergences of economic performance ought to narrow over time. Ultimately, what will matter for the world economy and for individual countries will be to minimise the longer-term economic scars from the pandemic.
The extent of such damage is highly uncertain. But 2021 has brought four pieces of news, three of which are encouraging. These help explain the brighter global economic outlook since January and the change in the optimal strategy from strict containment of coronavirus towards coexistence.
The first is that long-term damage will almost certainly be far smaller than that after the 2008-2009 financial crisis. The pandemic hit economies almost as a shock out of the blue rather than as the result of a fundamental problem in the system that needed fixing. Returning as close as possible to the pre-pandemic economy is something to be celebrated rather than feared.
Second, we now know that modern advanced economies can adapt much better to pandemic-related restrictions than appeared possible in the first wave of the virus.
The euro zone economy, for example, contracted 14.6 per cent in the first two quarters of 2020 but, after recovering sharply last summer, lost only 0.9 per cent of its size during the six months of the second wave of infections.
For advanced economies, this has allowed governments to impose restrictions without the same fear of economic catastrophe that were evident when Covid-19 first struck.
Effective vaccines are the third boon for the long-term health of the global economy. They raise the prospect that people can live their lives more normally without fear of permanent, severe restrictions on socialising and movement. There are concerns about waning immunity, but most of what we have learned about vaccination has improved the longer-term economic outlook.
The one important piece of bad news has been the increased transmissibility of the Delta variant, rendering lockdowns less effective for long-term virus control.
Asia and Australia’s struggles in containing rising case numbers now, having operated successful lockdowns in earlier waves, highlight the near-impossibility of eliminating this virus from circulation. Reduction to a manageable level is instead the new aim.
Restrictions on freedom
For global health and economics, we need to ensure the success of an international vaccination drive. A rapid reduction in Delta infections has occurred in Portugal, the Netherlands and the UK without the same level of hospitalisations or restrictions on freedom that characterised earlier waves of the virus.
As Gita Gopinath, the International Monetary Fund chief economist, said last week, any vaccination programme cannot be limited to the rich world. “The recovery is not assured until the pandemic is beaten back globally,” she said, calling again for one billion doses to be shared this year by countries with surplus supplies.
Up to now, there has been scant evidence of hoarding by rich-country governments, despite some initial shortages of vaccine supplies and their duty to protect their own populations.
But, as supplies improve, the imperative will be to vaccinate the entire world. With such large economic returns from reducing the health impacts of Covid-19, and very low costs of vaccine production, there can never have been such a good investment for the global economy.
Naturally, there are still big risks. Variants might emerge which escape the protection offered by vaccination. Immunity appears to wane over time, so even greater vaccine supply is likely to be needed. Vaccine hesitancy in many countries raises the prospect of severe health and economic consequences even with effective vaccines available.
Despite these dangers, the likelihood is that we are moving into a durable recovery phase after an acute crisis. The effectiveness of Covid vaccines has enabled us to see a clear path out of the crisis. It is still strewn with hurdles, but we should be optimistic. Humans are good at jumping over them. – Financial Times