The writer is president of Queens’ College, Cambridge university, and adviser to Allianz and Gramercy
As the new Covid-19 strain triggers tighter restrictions on economic activity and limits even more the movement of people, it has become increasingly clear that the road to vaccine-induced immunity will now have more potholes.
Already it was a journey that was likely to add further stress to the great disconnect between a buoyant and profitable Wall Street and a struggling Main Street.
The change should force policymakers and markets to pay more attention to three other features of this Covid era that are also consequential for the longer-term: the unusually large dispersion in performance in big economies, a significant worsening in inequality and deeper economic scarring.
Because it spreads much faster, the new Covid-19 variant has altered the health risk assessments of both individuals and governments. This inevitably imposes even bigger pressures on economic and social interactions even though the mutation is not thought, at least as of now, to change the treatment of the disease or immunity formation. Economists have no choice but to push out their expectations for a 2021 economic recovery.
Inevitably the new strain will amplify the dispersion in economic performance around the world. Europe is experiencing further disruptions to the movement of people and goods and accelerating the fall into a double-dip recession. So it is probable that we will see previously unthinkable differences in the growth rates of big economies. This may well include as much as a 20 percentage point annualised difference between the most stressed G7 economies and China for 2020, according to my calculations. Even within the G7, growth dispersion will be at exceptionally high levels.
Once again, an already excessive level of inequality in many countries will worsen. The burden of the mutated virus environment is suffered disproportionately by the disadvantaged segments of society.
Once again, the wealthy are likely to benefit if central banks feel compelled yet again to inject liquidity into markets. Once again, large companies with access to capital markets will benefit at the expense of smaller ones who rely on banks and local lenders.
Once again, the inequality of opportunity will rise as more schools go online and the young unemployed face a higher risk of the type of prolonged joblessness that can render them unemployable over the medium term.
Because the new Covid-19 variant both worsens the immediate economic hit and delays the subsequent recovery, short-term problems are more likely to become structural ones, and, thus, harder to solve.
If left unchecked, this would translate for most countries into lower longer-term productivity growth, higher household financial insecurity and a higher risk of disorderly financial volatility. This also risks undermining the social fabric and fuel greater political polarisation.
Meanwhile, on the global stage, dispersion in economic performance would aggravate cross-border tensions and lead to further weaponisation of trade tariffs and investment sanctions as well as other “beggar-thy-neighbour” policies.
Policymakers were already facing a very complex task in simultaneously delivering improved public health, restoring normal economic and social interactions and respecting individual freedoms. They now need to take on even bigger challenges.
Governments must urgently speed up pro-growth domestic reforms, rebalance their mix of fiscal-monetary policy and strengthen social safety nets. At the international level, we need much better multilateral policy consultation and co-ordination.
Central banks need to carefully consider their response to greater volatility in markets, including currencies, as the appropriate choices vary significantly from country to country. On financial sector issues, they must improve their understanding and prudential supervision of non-banks lest continued excessive risk-taking there undermine economic wellbeing.
As we head into 2021, investors will likely maintain an attitude that has served them well this year: put your faith in central banks’ ability to shield financial markets from any and all economic and corporate shocks.
This will encourage more irresponsible risk-taking by investors and debt issuers. It will also fuel investment approaches that fail to account for a longer term in which governments and central banks themselves face massive and persistent policy and operational challenges.