IN THE 1970S the fortunes of the world economy, in all its infinite variety and unfathomable complexity, seemed to turn on one solitary product: oil. Exported by a narrow clique of countries, this vital input was hostage to ferocious political forces. Today the world’s economic prospects similarly depend on another all-important input, vaccines, which are also narrowly produced, delicately political—and unevenly distributed. Widespread vaccination is helping America to boom, pushing core inflation to its highest rate since 1992. But delays in buying, making and deploying shots have left many parts of the world vulnerable to new virus outbreaks and economic setbacks. The Federal Reserve, which meets on June 15th and 16th, sets monetary policy chiefly with America in mind. But its decisions and deliberations reverberate globally and could raise the borrowing costs of economies on the other side of the vaccine divide.
The global economy should grow briskly this year: by 5.6%, according to the World Bank, which updated its forecasts this month. But it is a “tale of two recoveries”, says the bank’s Ayhan Kose. Rich countries, many of which have vaccinated their people relatively quickly, are enjoying an epoch of belief, a spring of hope, and so on. But where vaccination has lagged, especially in the poorest countries, some economies seem to be going directly the other way.
The divide between the jabs and jab-nots is visible even in a simple comparison of vaccination rates and growth forecasts (see chart 1). Among the big economies highlighted by the World Bank, the ten with the highest vaccination rates are forecast to grow by 5.5% this year on average. The ten with the lowest are set to grow by just 2.5%. The divide also shows up in forecast revisions. Thanks to America’s pace of inoculation (as well as the scale of its stimulus), its projected growth for 2021 was revised upwards from 3.5% to 6.8% since the World Bank last released its forecasts in January. Emerging economies that have vaccinated faster than their peers have also enjoyed larger upgrades to their forecasts.
On the other side of the divide, the picture is far more chequered. In the world’s poorest 29 economies (including 23 countries in sub-Saharan Africa) only 0.3% of the population has received even one dose of vaccine. This group’s growth prospects have actually deteriorated since January. Their combined GDP is set to grow by 2.9% this year (not 3.4% as forecast six months ago). That would be their second-worst performance in the past two decades. Their worst was last year.
Vaccination helps growth in at least two ways. It allows countries to relax lockdowns or any other restrictions on social interaction that are still inhibiting the economy. And in places like New Zealand that have already lifted such measures, it reduces the risk of a future outbreak, increasing confidence and making growth more resilient. Goldman Sachs, a bank, has calculated an “effective lockdown index” that combines a tally of policy measures with data on mobility drawn from mobile phones. It shows that social hustle and bustle has already returned to many countries with high vaccination rates (see chart 2). As the pace of inoculation picks up, other countries will join them. Indeed, the countries most likely to outperform over the next few months, Goldman Sachs has pointed out, are those that are simultaneously making rapid progress in achieving immunity yet still labouring under social restrictions. They have yet to feel the benefit of relaxing restrictions, but will soon have reason to do so.
In this kind of country timely economic data are still depressed by restrictions and inhibitions that will soon ease given the pace of vaccination. In other countries, however, such as Taiwan, new outbreaks of covid-19 have yet to show up fully in mainstream economic indicators, which remain strong. J.P. Morgan’s “nowcast” model, which tries to predict where the economy is today, based on monthly surveys and data, shows Taiwan growing at an annual pace of about 9% in the second quarter. But in fact the bank thinks that Taiwan’s economy will shrink over that period. In the euro area, by contrast, J.P. Morgan expects widespread vaccination to have lifted growth this quarter to over 7% at an annual pace. Their nowcast model, however, is predicting growth of less than 3%.
Given the importance of the global vaccine gap, it is worth asking how quickly it is closing. Japan, South Korea, Brazil, Turkey and Mexico will each have got at least one shot into the arms of half their population by August, reckons Goldman. South Africa and India will not reach that benchmark until December. In both of those countries, however, many people have already recovered from the virus, giving them some level of natural immunity. Michael Spencer of Deutsche Bank reckons that India, for example, could reach a 70% immunity level in less than nine months, counting everyone who has had either a past infection or a first shot of a vaccine.
An uneven recovery is better than none. But the strength of some countries’ growth could create additional problems for other parts of the world. America’s boom, for example, has pushed its own consumer prices up by 5% in May, compared with a year earlier, and could also add to price pressure elsewhere. This inflation could feed on itself, forcing central banks to respond. Turkey and Brazil have both tightened monetary policy in recent months, despite the ongoing pain of the pandemic. On June 11th Russia’s central bank raised interest rates for the third time since March. Its governor, Elvira Nabiullina, cited both vaccination rates and “extremely loose monetary and fiscal policies in major economies” as reasons behind the increase in Russian inflation to 6%. She worries that higher inflation in Russia and elsewhere may prove more persistent than “perceived at first glance.”
Even temporary inflation could unsettle financial markets, making investors doubt the Fed’s commitment to easy money. That could increase the risk premium emerging markets pay on their borrowing. “We are not necessarily worried about inflation,” says Mr Kose, whose team forecasts a rise in global inflation from 2.5% last year to 3.9% in 2021. “But we are worried about how these inflationary pressures can complicate policymaking” in emerging markets, especially those with large amounts of foreign-currency debt.
Policymakers in these countries fear a repeat of the “taper tantrum” in 2013, when the Fed’s talk about reducing (or “tapering”) its asset purchases led to an abrupt rise in American bond yields and a painful sell-off in emerging-market assets. No one expects the Fed to slow its pace of bond-buying at its meeting on June 15th-16th. Few expect it even to talk seriously about tapering. But several Fed officials have begun “talking about talking about tapering”, as Mary Daly of the San Francisco Fed put it last month.
Global inflation this year will remain a far cry from the double-digit rates experienced in the stagflationary 1970s. But just as the oil crisis back then forced policymakers into awkward dilemmas, obliging them to raise interest rates in the face of economic weakness, this year’s vaccine shortage could create similar discomfort for policymakers. The price of uneven vaccination may be premature austerity and monetary tightening in some unprotected parts of the world. Countries that jab too late may have to hike too soon.