• The delta variant of the coronavirus is one of the most infectious virus variants so far. Rising case numbers in many countries put the recovery at risk, threatening not only demand there but also supply chains in sensitive markets.
• Policymakers are confronted with an unpleasant choice: supporting demand and risk prices to overshoot or cutting back support and risk a potentially unnecessary slowdown of the recovery. The current situation looks more like the post-war recovery period of the 1950s rather than the 1970s, though, which suggests policy support to continue for now.
• The recovery will likely position the 'have' against the 'have nots' in the vaccine race: most of the G7 nations (plus China mainland) will perform relatively well, while others will lag behind.

The lineage B.1.617 of the SARS-CoV-2 virus, also known as the Delta variant, has been the dominant virus variant recently, prompting countries to reinstate containment measures and causing concerns for many policymakers around the world. The highly infectious variant was first detected in India in late 2020 and has been spreading in Southeast Asia and further to other countries of Asia, Europe, Africa, and the Americas. By early August 2021, the Delta variant has been responsible for more than 90% of all infections in places such as Singapore, China mainland, the UK, Australia, Germany, and the US.

Finding the right treatment for the world economy

Policy challenges that emerge from the spread of the Delta variant are manifold. On the one hand, supply prices are rising and delivery times are lengthening as the robustness of supply chains is tested. This could suggest a tightening of monetary policy. On the other hand, demand forces are still uncertain in parts of the world where the vaccination rate has been slower; in a few others, where vaccinations are advanced, cases have been increasing. This could suggest maintaining supportive monetary policy.

Fiscal policy support is still forthcoming. At this point, though, the global situation looks more like the immediate post-Second World War period rather than the 1970s: a somewhat longer, but limited period of higher inflation and supply-chain bottlenecks that inevitably accompanies the reconstruction effort following the pandemic. This is reflected in our central economic outlook, but risks of future policy mistakes that might change this are always there.

Vaccine distribution was hit hard when India, the world's largest vaccine manufacturer, halted all vaccine exports as the pandemic surged on the sub-continent during April and May. The COVAX initiative, on which many developing countries depend, was deprived of many of its vaccination doses. However, India has been ramping up production and accelerated the approval of other vaccines. Other countries started local vaccine production of their own, such as Algeria, Egypt, and the UAE.

The recovery is at risk

Asia remains at the epicenter of the pandemic and the spread of the Delta variant in particular. Many countries, including populous ones like Pakistan, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam have low vaccination but relatively high case rates. Several countries, particularly in Southeast Asia, have recently ramped up lockdown measures, likely choking demand.

In the US, there is a pandemic of the unvaccinated underway. While pressure to eventually get the vaccine is increasing, the economic consequences of high case numbers, particularly in southern states, will mean that the rebound of the economy could slacken in the coming months.

Europe has eased lockdown measures over the summer months. There is a clear risk that, with the colder season approaching and activities moving back inside again, the spread of the virus will accelerate, particularly in those countries which lag behind in vaccination. Although almost all countries have ruled out another lockdown, there is a clear risk that demand will be suffering nevertheless, especially since fiscal policymakers' arsenals are declining.

Very low vaccination rates put almost the entire African continent at risk, except for perhaps parts of Northern Africa which have had relatively low case rates during the summer months. The COVAX initiative will gain further traction, which will benefit many low-income African countries.

Africa strongly depends on global commodity prices, which have been on the rise in the first half of 2021 but might enter a tailspin if global demand falters as a result of tighter lockdown measures in Asia and other places. Oil-producing countries in the Middle East will keep a close eye on demand as well. Another steep fall of oil prices similar to March 2020 is unlikely, but a protracted weakening of oil prices would have similar consequences for several Middle East oil producers.

The recovery in Latin America is in a similar position to elsewhere in the emerging world. Another lockdown is virtually ruled out, but risks of another wave ravaging the region are still there, especially since most of the Latin American countries have been inoculating at a low pace so far.

Vaccine or no vaccine

Trade, travel, and tourism have recovered to varying degrees from the lockdown measures but are clearly not out of the woods yet. While trade might be able to continue to rebound, travel and tourism will likely face yet another period of uncertainty as cases flare up in different parts of the world. Countries with a strong reliance on tourism will be affected.

The economic recovery that is likely to ensue is an upturn that pits the smaller but wealthier share of the world that is vaccinated against the larger but poorer share of the world economy that lags in the vaccination race. In other words, most of the G7 nations (plus China mainland) are expected to perform relatively well, while uncertainties will remain especially high in other parts of the world.

Posted 31 August 2021 by Ralf Wiegert, MENA economics team lead, Economics & Country Risk, S&P Global Market Intelligence