Three new reports on vaccines working effectively lead to optimism about the economic forecast. That’s great, leading business leaders to wonder just how fast the infection will die out, and thus how fast the economy will recover. Will it be the first quarter of 2021 or the last, or into 2022? The answers depend on the epidemiology of Covid-19.
The aggregate economy will be able to get back to normal totals around the end of 2021, though some damage will linger well into 2022. In addition, changes within the economy will take some sectors to new heights while leaving other sectors permanently weaker.
A vaccine reduces the spread immediately, though not completely. Covid-19 in the U.S. has an R0 value estimated by the CDC to be 2.5, meaning that when an infected person lands in a country where everyone is susceptible to the disease, that person spreads it to 2.5 others, on average. Each of those people spreads it to another 2.5, and so forth. After five rounds, infections have reached nearly 100 people. After another five rounds, the disease has infected nearly 10,000 people.
If we got the first case when 10% of the population had already been vaccinated, then instead of an additional 2.5 people getting infected the number would be just 2.25, or 90% of the R0 value. That’s not a solution, but it’s a start down the road to a solution. Projecting a simple epidemiological model into the future, I saw that vaccinations have a substantial impact once about 40% of the population get their shots. There’s some improvement earlier, and continued improvement with more vaccination, but the 40% figure is a good benchmark to look for.
Most of the U.S. population will be vaccinated by the end of 2021 according to an evaluation of estimates by Bob Wachter of the University of California San Francisco medical school. His chart, shown above, suggests that the United States will reach the 40% benchmark before mid-year of 2021. However, in economics every straight line is considered metaphorical, and that probably applies to this chart as well.
Until better information about timing of vaccinations emerges, the most likely scenario is that cases of Covid-19 drop dramatically in the middle of 2021. Vaccination levels will combine with warmer weather to reduce infections dramatically in the summer. (Warm weather seems not to bother the virus itself, according to several scientists who have studied Covid-19, but it does enable people to socialize more safely, out of doors and at a distance.)
Economic behavior may lag a bit depending on whether lingering fear overwhelms cabin fever. Improvement of health could lead to risky behavior, giving us a temporary setback. A good guess, though, is that by the end of summer, business activity will accelerate as people feel more comfortable about being close to others.
Business recovery will vary across sectors. Those restaurants and theaters that have survived will boom in the summer or fall of 2021. Travel destinations may be a bit slower to rebound as attitudes gradually change. Some businesses will never reopen, but others will take their place. Unfortunately, that will take a little longer. Existing restaurants will be crowded while the new restaurateurs arrange financing, locations, suppliers and staff. This process of new businesses replacing closed companies will likely take a full year, limiting the economy’s full recovery. The good news: By the end of 2021 the U.S. economy will be mostly recovered. The better news: By the end of 2022, it will be fully recovered in terms of aggregate activity in comparison to its potential. The bad news: We will never quite get back to where we would have been in the absence of the pandemic.
That permanent gap from our old trend line comes from loss of productive capacity. Some people chose to retire early due to the pandemic, and some workers died. Thus the labor force will be smaller than it otherwise would have been. Capital investment in tools, machinery and computers was lower in 2020 than it would have been, and we’re not likely to fully make up that shortfall.
The economy will also be different when the aggregate numbers are totaled up. Our shift to online shopping advanced far faster than it would have. And we learned that remote work can work. That will trigger long-lasting changes in where we work, and thus where we live, and what kind of homes we want.
The vaccines will be a great boost to the economy, acting quickly—but not instantly—to get the economy going. Business leaders at this point should develop contingency plans for a much stronger economy.
OTTAWA – The Canadian economy was flat in August as high interest rates continued to weigh on consumers and businesses, while a preliminary estimate suggests it grew at an annualized rate of one per cent in the third quarter.
Statistics Canada’s gross domestic product report Thursday says growth in services-producing industries in August were offset by declines in goods-producing industries.
The manufacturing sector was the largest drag on the economy, followed by utilities, wholesale and trade and transportation and warehousing.
The report noted shutdowns at Canada’s two largest railways contributed to a decline in transportation and warehousing.
A preliminary estimate for September suggests real gross domestic product grew by 0.3 per cent.
Statistics Canada’s estimate for the third quarter is weaker than the Bank of Canada’s projection of 1.5 per cent annualized growth.
The latest economic figures suggest ongoing weakness in the Canadian economy, giving the central bank room to continue cutting interest rates.
But the size of that cut is still uncertain, with lots more data to come on inflation and the economy before the Bank of Canada’s next rate decision on Dec. 11.
“We don’t think this will ring any alarm bells for the (Bank of Canada) but it puts more emphasis on their fears around a weakening economy,” TD economist Marc Ercolao wrote.
The central bank has acknowledged repeatedly the economy is weak and that growth needs to pick back up.
Last week, the Bank of Canada delivered a half-percentage point interest rate cut in response to inflation returning to its two per cent target.
Governor Tiff Macklem wouldn’t say whether the central bank will follow up with another jumbo cut in December and instead said the central bank will take interest rate decisions one a time based on incoming economic data.
The central bank is expecting economic growth to rebound next year as rate cuts filter through the economy.
This report by The Canadian Press was first published Oct. 31, 2024
