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https://scmp.com/comment/opinion/article/3113383/vaccine-optimism-must-be-tempered-attention-coronavirus-resurgence
Comment/ Opinion

Vaccine optimism must be tempered with attention to coronavirus resurgence

  • While market sentiment has been dominated by hope that encouraging vaccine results will lead to economic recovery, the resurgence of the virus, especially in the US and Europe, means policy support must continue
A nurse prepares a dose of the Pfizer-BioNTech Covid-19 vaccine at the Northern General Hospital in Sheffield, UK, on December 8. Photo: AFP

Contrasting developments on the coronavirus and vaccine fronts have been sending mixed signals to markets in recent weeks. The Covid-19 infection situation has deteriorated, with a resurgence in Europe and the US, while trials of vaccine candidates have produced encouraging results.

So far, market sentiment seems to have been dominated by vaccine optimism. Global equities had their largest monthly gain in November since 1988, helped by positive vaccine news on three consecutive Mondays during the month, in addition to US election relief. The strong performance has continued into December with global equities reaching new highs.

Hopes for working vaccines and rapid distribution suggest we might see a faster normalisation of economic activity, especially services. That’s promising for the global economy later in 2021, but the near term is still challenging.

While Britain started its vaccination programme this week, mass vaccination of the general public will take several months, with the effect more visible only towards the second half of the year.

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Meanwhile, the virus resurgence continues to weigh on economic activities in the near term. The composite PMI readings for both the euro area and Britain have dipped below the 50 level in November, pointing to a sequential slowdown in economic activity. The decline was mainly concentrated in the service sector, as social distancing measures tightened in the region.

Data out of the US is holding up relatively better, but there are some early signs of weakness. Hiring has slowed, with non-farm payrolls for November notably below market expectations. In particular, the retail sector lost 35,000 jobs during the month amid surging Covid-19 cases in the US.

That said, the links between rising case counts and bad economic outcomes appear to be weaker than early this year, suggesting the deteriorating virus situation is having a more limited effect on activity. Fatality rates have moved up alongside rising case counts in Europe and the US, but they are still well below their March peaks.

Amid generally less dire health outcomes, the connection with social mobility also appears to have lessened. Based on travel and navigation app usage data, the level of activities involving travel remains relatively unchanged from September/October in the US, while in Europe activity levels have fallen in recent months but are not as low as during March.

Shoppers walk through Macy’s flagship store in New York on November 27. The US retail sector lost 35,000 jobs during the month. Photo: Bloomberg
Shoppers walk through Macy’s flagship store in New York on November 27. The US retail sector lost 35,000 jobs during the month. Photo: Bloomberg

Nonetheless, gross domestic product growth in the euro area and Britain are likely to move into negative territory in the fourth quarter, and we should expect somewhat slower US economic growth in the first quarter of next year.

Given the near-term headwinds from the virus resurgence, ongoing policy support remains important to limit long-term damage to economies. There is somewhat better news on the US fiscal front recently, despite lingering uncertainty.

Congress has yet to reach an agreement on the latest fiscal stimulus proposal worth US$916 billion, but talks have taken a more positive turn this week. In Europe, reports also suggest hopes are rising for a deal with Hungary and Poland over their stand-off on the European Union’s long-term budget and recovery fund. Once rectified, it would allow disbursement of the recovery fund in 2021.

At the same time, major central banks seem to be prepared to roll out further stimulus to shore up their economies. In recent weeks, the Bank of England and the Reserve Bank of Australia have expanded their quantitative easing programmes.

This week, the European Central Bank introduced more easing measures at its December meeting, including expanding its monetary stimulus programme by 500 billion euros (US$605 billion). The Federal Reserve has also indicated its willingness to modify its asset purchases to make them more stimulative when it meets next week.

Federal Reserve chairman Jerome Powell and Treasury Secretary Steven Mnuchin bump fists after a House Financial Services Committee hearing in Washington on December 2. Photo: Reuters
Federal Reserve chairman Jerome Powell and Treasury Secretary Steven Mnuchin bump fists after a House Financial Services Committee hearing in Washington on December 2. Photo: Reuters

Even in North Asia, where the virus situation is under better control, there is a need for more policy support. As Covid-19’s “first in, first out” economy, China’s recovery is well on track, with solid growth momentum in November. However, keeping an accommodative monetary policy stance is still important in the near term to facilitate further recovery in private-sector consumption and investment.

China’s inflationary pressure is expected to remain muted in the coming months as food-price inflation softens, reducing the need for the People’s Bank of China to significantly tighten monetary policy. Elsewhere in the region, the Korean National Assembly has recently approved additional stimulus of 3 trillion won (US$2.8 billion) to deal with the third Covid-19 wave in the country.

While better news on the vaccine front is boosting the medium-term economic outlook, the world will continue to lean on policy support through a dark winter of virus resurgence.

Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management