An important exception to this central case, however, is emerging Asia, where vaccinations rates remain low and authorities have been more willing to re-impose restrictions. Countries in the region are therefore likely to experience a more meaningful loss of economic momentum, at least through the third quarter, and until vaccination rates pick up substantially.
In addition to the positive news on vaccines, accommodative monetary and fiscal policy continues to support the global economic recovery, with policymakers still in “whatever it takes” mode. In China, for example, the central bank recently cut banks’ reserve requirements, in a pre-emptive effort to promote lending and safeguard growth. This is a telling indication of the central bank’s attentiveness to downside risks, given that until recently, Chinese officials were intent on normalizing policy. Even those central banks in advanced economies that have moved towards withdrawing accommodation, such as the Norges Bank, the Reserve Bank of New Zealand and the Bank of Canada, are taking measured steps that indicate they are willing to reverse course if risks to growth materialize. Finally, Jerome Powell and other core Federal Open Market Committee members have stressed their patient approach to assessing whether the recent increase in inflation will prove transitory. Inflation risks may be somewhat greater than the Committee anticipated at the beginning of the year, but the Committee still plans to wait until the economy is back at maximum employment before contemplating a first rate hike.
Reduced fiscal stimulus may be a drag on growth in many countries this year, but in some cases, such as the euro area and the US, the drag may be less than anticipated. In the euro area, disbursements from the EU recovery fund are just getting under way. In the US, where the impact from household stimulus checks and enhanced unemployment insurance benefits is fading, other provisions of the spring-time American Rescue Plan are kicking in. Close to 40 million households, with approximately 88 percent of all children in the country, received the first installment of the new child tax credit in July, and most states, local governments, and school districts have yet to spend the bulk of federal funds received.1
None of this is meant to suggest an insignificant human toll associated with new, highly transmissible variants of Covid. Nor is meant to deny that surging new cases will be a drag on growth in many countries, largely due to reduced household consumption and constraints on labor supply. But progress in vaccination campaigns and more effective treatments reduce the odds of a return to lockdowns that would derail the economic recovery.
More broadly, the prevalence of new variants highlights an uncomfortable reality. Sustaining a global economic recovery will require significant progress in vaccination rates around the world. Until that occurs, expect an uneven and halting recovery, marked by sluggish spending on services, continued capacity constraints, inflation pressures, and widening income inequality. And the longer it takes to achieve high rates of vaccination in both advanced and emerging economies, the greater the odds of longer-term economic damage.
1. “IRS, Treasury announce families of 88 percent of children in the U.S. to automatically receive monthly payment of refundable Child Tax Credit,” IRS, May 17 2021.
Availability of this document and products and services provided by MacKay Shields LLC and/or MacKay Shields Europe Investment Management Limited (collectively, “MacKay Shields”) may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for informational purposes only. It does not constitute investment advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction.
This material contains the opinions of certain professionals at MacKay Shields and are subject to change without notice. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC.
Past performance is not indicative of future results.
©2022, MacKay Shields LLC. All Rights Reserved.
To obtain entire/whole article, including full disclosures and source attribution which must be read with and form the complete version of the above commentary, please select “Download Article” above.