As experts speak less about herd immunity or eradicating COVID, economist walks through three possible scenarios
With the world going on to its second year of the pandemic, expert views are slowly creeping away from a future without the SARS-CoV2 virus. It’s becoming increasingly likely that even with higher global vaccination rates, COVID is here to stay – and an economist from CIBC is imagining what that means.
“The experts these days no longer talk much about achieving ‘herd immunity’ or the eradication of the SARS-CoV2 virus. … [T]he consensus is now that the SARS-CoV-2 virus will remain with us,” wrote CIBC economist Avery Shenfeld in a recent commentary.
Even with centuries of medical advances, Shenfeld noted humanity still has no certainty about what a post-pandemic phase of COVID-19 will look like. But he suggested three possible scenarios that could play out.
For optimists, according to economic estimates, the pandemic will stop shortly after Omicron. In practical terms, this just means the world won't be crushed under synchronous tsunamis of viral infections. However, it does not rule out the possibility of regional flareups at several locations around the world due to simultaneous massive waves of infection during the next few years.
In the best-case scenario, Omicron infections in large numbers combined with increased vaccination rates will pave the path for increased tolerance. Future waves will something more like to a common cold, which he noted is just a minor infection due to a coronavirus.
“If Omicron ends up being the last of its kind, we will permanently remove the barriers to supply that are related to Covid-tied production or shipping shutdowns, but also permanently lift the demand headwinds for high-touch services,” Shenfeld said. “Growth could accelerate, but so too would potential output, leaving more room for the economy to expand without upward pressure on inflation.”
Because the world would be starting from nearly full employment, he said the U.S. and Canada would still see a monetary tightening cycle, akin to CIBC’s forecast of short rates topping 2% in 2024, though productivity improvements might enable two more years of 4% growth.
For a moderate scenario, Shenfeld pointed to several headwinds to growth including a slowdown due to presumed seasonality of the coronavirus, persistent supply-chain issues due to occasional viral waves in other parts of the world, and hampered productivity due to a continued need for social distancing and indoor capacity limits.
He also noted how current vaccine production plans would leave the world 15 billion vaccines short of the 22 billion needed to complete a global, three-dose mRNA vaccine series. That need was projected by a joint report calling for universal deployment of the vaccines currently most effective against COVID-19 infections.
“in this scenario, which matches our base case, we likely face a couple more years of smaller, less-globally synchronous Covid outbreaks that are still disruptive to production, and which generate temporary pull backs in high-touch services,” he said. “The impacts on inflation from these further, but still milder Covid waves are ambiguous. … That said, we still see the economy operating near full employment during lulls in Covid case counts, as was the case just ahead of Omicron.”
For the middle case, he projected central banks would embark on a gradual tightening path, with an end point for rates in 2023 or 2024 not materially different from the optimistic scenario. Still, it will result in a less-rosy outlook for businesses and sectors that are counting on a permanent return to full demand for services and full output.
Under the most pessimistic scenario, he suggested that Covid-fatigue and divisive politics might prevent the world from taking necessary steps to promote public health and achieve acceptable vaccination rates. Some scientists are sounding the alarm, he added, suggesting that mass vaccinations and large numbers of mild COVID cases might not be the causes for comfort that people assume them to be.
“Economically, that scenario would be outside any forecast we’ve seen. Large enough waves of a more deadly variant than Omicron would likely push us well back from full employment, while still hampering supply,” he said, noting that it would present central banks with a dilemma: either let inflation run hot due to supply issues, or tighten policy and create worse unemployment.
And while companies that benefited from the stuck-at-home dynamic of the pandemic might see a lift, those reliant on travel, dining out, entertainment, and other high-touch activities will be punished.
“Again, that’s not our forecast. But investors need to keep it in mind as a risk in considerating optimal portfolios and hedging strategies, while firms vulnerable to future Covid waves should be putting some weight on defensive measures and balance sheet strength,” Shenfeld said. “Hopefully we won’t have to use them, as we’re counting on governments to take Covid seriously enough to remain vigilant for signs of new variants ahead.”
