The surge in the Covid-19 delta variant worldwide is raising concerns about the robustness of what has already been an uneven and uncertain global economic recovery. The extent of this worry speaks to medical and economic policy issues, dealing both with factors that we seem to know a lot about and others that remain unknown 18 months into the pandemic. Only by making faster progress on what we know can we reduce dangerous exposure to what we don’t.
Let’s start with the two things that most people agree on: First, that the delta variant is much more infectious than earlier iterations; and second, that the link from infections to hospitalizations and deaths has fortunately been weakened, though only for countries that have made significant progress in vaccinating their populations.
We also know that the risk of new variants will persist if the world continues with what has been a sequential and uncorrelated approach to fighting Covid. Sequential in the sense that no country seems to have been able to win on all three fronts yet: maintaining a minimal level of infections, reaching critical mass on vaccinations and having strong shields against new variants. And uncorrelated in the sense that countries worldwide are all over the place in terms of these three metrics — from Australia, which has been highly effective in controlling infections but slow on vaccinations, to the UK, which has high vaccinations but surging infections, to South Africa, which is lagging on all three.
Much less in known about the residual strength of the resistance to hospitalizations and death in relation to vaccines. While hospitalizations remain relatively low in countries with high vaccination rates, such as the UK, there are cases of vaccinated patients in hospitals. Even less is known about the potential “long Covid” risks that infected people face, whether they end up hospitalized or not. We also don’t know enough about the mutations that could flourish in infection-rich environments, including the risks they pose to the effectiveness of vaccines.
Together, these factors determine how well and for how long we can live with Covid and also influence economic policies. Specifically, the effectiveness of government and central bank measures depends on where we end up on these known unknowns.
The less dangerous the link between infections and serious health threats, the greater the scope for policies to navigate through a two-part pivot that is essential for supporting high growth that is both inclusive and sustainable. The first pivot involves less reliance on central banks buying financial assets in an ample and predictable manner and more on growth-oriented fiscal and structural policies; and the second involves transitioning from less relief stimulus to much more emphasis on improving physical and human infrastructure.
Should the link prove more damaging, policy will find itself having to deal with both demand and supply problems that ultimately could even produce stagflationary pressures — the hardest combination for policy to counter and also most problematic for most financial asset valuations. If the probability of such a situation were to increase significantly, governments and central banks would have to scramble to do more on two things at the same time: try to counter a sharp drop in private demand, both in household consumption and corporate investment; and, on the supply side, try counter the proliferation of even more bottlenecks and labor market rigidities that would risk persistent inflation pressures despite lower demand.
Everyone wants to declare the pandemic over and enjoy a period of high, durable, inclusive and sustainable growth. It is now increasingly clear that this depends on two sets of issues: one that we don’t have answers for yet, starting with the effectiveness of vaccines against new Covid variants; and the other, for which we do have answers, involving the need to pivot rapidly and impactfully to a more simultaneous and correlated medical approach worldwide (including by facilitating catch-up on the part of those lagging in vaccination) while accelerating the economic policy pivots.
Bloomberg
