economist

Earlier this year, it looked like the world economy might have COVID-19 on the run. After a torrid 2020, forecasters expected the international economy to bounce back through 2021, propelled by a global vaccine rollout and backstopped by a huge amount of government support. Some elements of that optimistic perspective still hold. The latest (July 2021) IMF forecast for the global economy, for example, sees world real GDP growing by six per cent this year, unchanged from its April 2021 forecasts and comfortably above both the 5.5 per cent the IMF was forecasting in January this year and the 5.2 per cent growth in 2021 it was expecting in late 2020. Moreover, the scope of the vaccine rollout has continued to expand. By the end of July 2021, more than four billion vaccines had been administered across 180 countries, enough to vaccinate more than a quarter of the world’s population. The average daily global vaccination rate stood at about 42 million doses, putting the world on track to attain 75 per cent population coverage in another six months.

However, dig into the details, and some of the shine has come off the global outlook as the rapid spread of the Delta variant has posed a growing challenge to the world’s vaccination effort. In particular, one critical impact of the new strain has been to widen an already-existing divide between vaccine “haves” and “have nots”. That gap comes with worrying public health and economic implications.

Vaccination variables

At the time of writing, Bloomberg estimated that countries with the highest income levels were getting vaccinated at a rate more than 30 times faster than those with the lowest. As a result, the IMF calculated that while roughly 35 per cent of the population in advanced economies had been fully vaccinated by the middle of the year, the comparable vaccination rate for emerging markets was less than 10 per cent. For low-income countries, it was barely above one per cent. The IMF thinks we should be targeting a vaccination rate of 40 per cent of the population of each country by the end of this year. But it estimates that, as of midyear, close to half the world’s countries still had daily vaccination rates below the number needed to meet that target.

The divide in vaccine rollouts is splitting the global economy into two blocs. One comprises most advanced economies, where the IMF’s assessment is that the pace of rollout is likely consistent with prospects for a normalisation in economic activity by the end of this year. In the other, dominated by emerging market and low-income economies, the IMF worries that inadequate access to vaccines leaves countries vulnerable to resurgent infections driven by Delta as well as the consequent economic fallout. Moreover, there are potential negative spillovers to the rest of the world economy in terms of economic and health outcomes, not least because a slow pace of vaccination risks the spread of new variants and boosts the chances of breakthrough infections among vaccinated populations. It’s therefore no surprise that the IMF warns that delays to the vaccine rollout are the single biggest risk currently facing the world economy.

“The International Monetary Fund warns that delays to the vaccine rollout are the single biggest risk currently facing the world economy.”

Impact on Australia

Australia is also suffering from the impact of the Delta variant. Until recently, we appeared on track to outshine our global peers in the context of a major international crisis for a second time, adding a successful pandemic response to our previous achievement in avoiding the worst of the global financial crisis. Last year, global rankings such as Bloomberg’s COVID Resilience Ranking (which scores the world’s largest 53 economies on their success at containing the virus with the least amount of social and economic disruption) put Australia in the top three “best places to be” during the pandemic, just as the economy’s rapid recovery in real GDP had Australia ranked near the summit of the OECD’s growth table. Add in a dramatic labour market turnaround that had driven the unemployment rate below five per cent for the first time in a decade and it was no surprise national measures of business and consumer confidence had soared to record levels earlier this year. Given that backdrop, the policy conversation had recently shifted to the likely timing for a withdrawal of stimulus, with the RBA’s July 2021 board meeting seeing the central bank announce that it would — cautiously and gradually — begin to taper its monetary policy by reducing the scale of its asset purchases.

The arrival of Delta, combined with a disappointingly low national vaccination rate by OECD standards and followed by the extended lockdown of greater Sydney and subsequent declines in public sentiment and business activity, has threatened to undermine some of that progress. Treasury put the combined impact of the most recent lockdowns in New South Wales, Victoria and South Australia at about $300m a day, or more than $2b a week. And while two of those three states had exited lockdown by the time of writing, public health restrictions in Sydney had been extended further. Third quarter GDP, therefore, seems destined for a sizeable contraction that will drag down the full-year outcome. Past experience with lockdowns suggests some of this activity will not be lost, but rather postponed until restrictions are released, raising the prospect of some positive economic payback in Q4. But that’s conditional on the NSW government getting the current outbreak under control and leaves short-term prospects hostage to containment measures and the pace of vaccine rollout. Meanwhile, growth this year will be lower, and unemployment higher, than on the pre-Delta trajectory. And Australia’s previously enviable global reputation on pandemic performance has taken a hit, with the country tumbling 21 places down those COVID resilience rankings in July this year.

Both global and Australian developments, then, offer two important messages. First, the vaccine rollout remains critical to the COVID endgame. Second, take nothing for granted — including relative national performance — during this pandemic.