Peak growth has likely passed warns Bank of America

As many market observers have noted - with just a slight shake of their heads - the first year after the pandemic has outpaced most other recoveries of the past 50 years, and risk assets have already recovered in one year what it has taken two years in previous recoveries.

However, before anyone starts getting comfortable, it comes with a warning from those naysaying Analysts who have warned that peak growth may have already passed, following an astonishing recovery from the Covid-19 pandemic.

Ethan Harris

Head of Global Economics BofA Global Research

July 23, 2021

 Financial markets are finally catching up to the idea that the Covid crisis is not yet over. Countries with low vaccination rates are most acutely feeling the effects of a new surge in cases. Even some countries with abundant vaccine supply are having major issues due to vaccine resistance. The Delta variant adds to the challenge, raising the number of cases and the threshold for herd immunity.

In the U.S., one-third of adults are unvaccinated leaving them three times more likely to contract the Delta variant than a vaccinated person, and 14 times more likely to be hospitalized. Recent surveys highlight deep opposition to vaccinations in parts of the country: of that one-third, 18% of respondents said they would not get vaccinated and 11% say they are uncertain. In some states Covid is viewed as a relatively low health risk, and these states will tend to not only have low levels of vaccination, but also will tend to resist both voluntary and involuntary social distancing. There is already evidence of a link between vaccination rates and the growth in cases (see chart below). Since most of the cases will be in parts of the country that care the least about cases, the economic impact from the virus will likely be more subdued. That said, persistently high case counts nationally could ultimately impact behavior of consumers that have been vaccinated raising the downside risk to our growth outlook.  

Meanwhile, most of Europe seems to have less vaccine resistance than the U.S. After initially lagging behind the U.S., the largest European countries are now moving steadily ahead in vaccinations as a percentage of population. Head of Europe Economics Research Ruben Segura-Cayuela and team are keeping a particularly close eye on the early Delta hotspots within the EU - Portugal, Spain, Greece, the Netherlands, Malta and Cyprus. These early hotspots generally resorted to localized restrictions, limited to very high-risk activities (e.g. indoor dining and nightclubs) and, for now, the contagion dynamics seem to be slowing. It's still too early to say but, if relatively soft restrictions (paired with fast vaccination rollouts) can keep Delta infections somewhat under control, this would be good news. August could prove to be a challenge if Europeans venture out for their usual summer vacations.

In the UK, cases per capita are the highest in the world, but the government made the decision to move ahead with full reopening on July 19th. Crowds are back at pubs and nightclubs, and just as we believe restricting high-risk activities in the Netherlands and Spain could have been a big factor in bending the curve, the UK is testing whether this will work in reverse.  

 Looking ahead, we note that in countries with high vaccination rates, the health cost of the surge will be mitigated, but high case counts could last for some time. The divide between the haves and have nots has moved from differences in social safety nets to differences in access to vaccines. Overall, we see the Delta surge as a moderate headwind to global growth, but as new information comes in, we can be persuaded otherwise.

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