Reconsidering Covid: Implications for the Global Economy | Lord Abbett
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Economic Insights

The emergence of the Delta variant upended expectations of a smooth "return to normal" for the global economy

Transcript

Voiceover: Welcome to the investment Conversation. I’m Tony Fisher

VO: [SFX: Swan calls]

[https://www.allaboutbirds.org/guide/Trumpeter_Swan/sounds#:~:text=Hartshorne%20%7C%20Macaulay%20Library-,Calls,or%20to%20sound%20an%20alarm.] Sometimes a “Black Swan” can come up with an extra surprise or two. After the worst pandemic in a century—the sort of unexpected, game-changing event represented by the proverbial waterfowl—the emergence, and rapid spread, of the Delta variant of COVID-19 upended expectations of a vaccine-led “return to normal”. Here’s Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases.

AUDIO OF DR. ANTHONY FAUCI, DIRECTOR, NATIONAL INSITITUE OF ALLERGY AND INFECTIOUS DISEASES: [0:38] What do we know about that variant? The transmissibility is unquestionably greater than the wild-type SARS-CoV-2, as well as the Alpha variant. It is associated with an increased disease severity, as reflected by hospitalization risk, compared to Alpha.

SOURCE: https://www.whitehouse.gov/briefing-room/press-briefings/2021/06/22/press-briefing-by-white-house-covid-19-response-team-and-public-health-officials-42/

Since this press conference in June , Delta has forced policymakers, economists, and investors to reconsider the trajectory of the pandemic and its implications for global economies and financial markets. In this podcast, Lord Abbett Portfolio Manager Jeffrey Herzog looks at some of how these unexpected developments might influence global economic growth.

*Music fade out*

First off, some observations about how things have changed since earlier this year.

Jeffrey Herzog: Well, I I like to go back and try to explain our mindset in at least [the first quarter] and, if you look back to that quarter, growth was recovering very strongly. And that was very favorable to risk--people wanted to go out and do normal things again, they wanted to get back to their normal lives, and that was very favorable for companies that were rooted in the real world, if that makes sense, and the Fed was maintaining it's easy [monetary] policy, it was maintaining its monetary stance so the mix of all those things, was very favorable too risk [assets] and very favorable to companies that were undervalued, because of the shock of the crisis.

Fast forwarding to now where, at least in the past few months, the story is more nuanced in the sense that all that optimism of the reopening period was revolved around the idea of very fast switch from people spending on consumer goods to people's spending on consumer services and services were more likely to be things that would get you in contact with other humans as opposed to spending on goods and recreational items that you would largely enjoy in a kind of more COVID-safe environment.

And another element of this was really you know, we still have some or maybe even a little bit more vaccine hesitancy than we were expecting. And we still have some outbreaks in various parts of the country that were creating more cautious or slower trends in consumer spending than we were anticipating. You can see this, if you look at the trends in personal consumption expenditures, which is a data series compiled by the government to show us anything about consumer spending on a monthly basis, you can see that you know, food and services spending is largely back to trend.

Whereas, you know transportation services are not motor vehicle rentals are back to like the trends, you might imagine before coming but international travel is not and there are a lot of logical reasons for that. And you know reporting a tremendous amount of demand, have a tremendous amount of spending in the economy and recreating a tremendous amount of demand and you know that would inevitably mean some supply constraints is everybody kind of rushes to buy things that they could not more do things that they could not earlier, but the extent of the supply constraints are really taking longer than a lot of people expected.

And when I think of a couple of major examples of those I’m thinking of semiconductors and also the backups in the ports on the west coast that we're seeing right now.

VO: For economies around the world, he trajectory of recovery has been highly dependent on the distribution of COVID vaccines. Many emerging-market countries had seen little uptake of the vaccines before the Delta variant put their healthcare systems under pressure once more. Jeff had some insights on the impact of Delta on emerging markets—especially China.

Herzog: Well, let me backtrack a little bit and take you back to the vaccine distribution angle, so the reason why we're seeing such difficulties in emerging markets are largely because vaccine supply has been so bifurcated between the developed to the parts of the world that produce it and the emerging market countries which have to rely on things like international organizations like [multinational vaccine collaborative effort] COVAX.

President Joe Biden [Audio Clip]:

With regard to India, I spoke at length with Modi, the Prime Minister. We are sending immediately a whole series of help that he needs, including providing for those - remdesivir and other drugs that are able to deal with this and prevent, in some cases, but recover - help recovery. Secondly, we are sending the actual mechanical parts that are needed for the machinery they have to build a vaccine.

Source: President Biden Remarks on COVID-19 Pandemic Response, April 27, 2021 White House dot GOV

It's a matter of really getting vaccines into people's arms and his confidence and ease and mobility restrictions.

But what I was really what I tend to focus on it from a starting point is the biggest emerging market which is China, and I think the change in perception there you know if we're looking back to Q1 or Q2 was that China was a standout performer because they had high compliance with what the government was telling them to do in terms of staying safe and restricting mobility terms of wearing masks.

They have a few homegrown vaccines as well, which they're trying to get into people's arms, but may not be as effective as they want. And they were the manufacturer last resort, despite all the you know trade tension and rhetoric that we saw over the past few years and they had some tremendous growth and the gate now in the past few months, this kind of turned around a little bit because they had hotspots too, and of course they have a lower tolerance for the amount of cases, and so they react very strongly to probably a US lower number of cases than, say that the state of Florida, would you know, for example, and that's not a great comparison, but those are two pretty extreme government perspectives on COVID and there were also some one-off events to that hit China, there was a typhoon or floods, there was a regulatory crackdown the private sector that is still going on, so these were some growth impediments to China recently that we're not well anticipated by markets, and that was a surprise and the rest of EM is really tied up with Chinese recovery, in addition to the vaccine dispersal that we talked to just the beginning this.

VO: Let’s shift from emerging markets and China to the developed world, certainly where efforts continue to boost the availability and uptake of COVID vaccines. Here’s Dr. Marco Cavaleri of the European Medicines Agency, a specialist in vaccine strategy.

AUDIO CLIP: [2:29} DR. MARCO CAVALERI, HEAD OF BIOLOGICAL HEALTH THREATS & VACCINES STRATEGY, EUROPEAN MEDICAL AGENCY: Vaccination efforts are still ongoing in the European Union and worldwide, and as EMA and the European Center for Disease Control & Prevention have alighted in their most recent joint statement, the evidence shows that all the vaccines authorized in Europe for use against COVID 19 offer a high degree of protection.

Source: https://www.youtube.com/watch?v=RonCekqjXIg&t=403s

Herzog: Well, I think the interesting angle here is that a couple quarters ago we saw Europe lagging too in terms of vaccine just implementation, and that was because, although they produce a lot of vaccines in Europe. The distribution process or the mechanics of distributing it off got off to a bad start, and now we are seeing actually Europe get ahead of the US in terms of vaccination percentage of the population and part of that is some policies that they've implemented some mandates to get back seated.

And this is a bit of a difference between Europe and the US, Europe has generally more centralized government us, of course, we get down to state and local level and and there are some differences in what you can and can't do.

But Europe has been able to be a little bit more aggressive of mandates they've stayed the course with vaccine, distribution and that's a reversal from what a lot of people were thinking.

You know a few quarters ago and so that has been something about of a lift to them in terms of consumer confidence and people's perception of what is possible over the next few months. On a side note, I think that the vaccine mandates in the US may have incrementally a little less impact. You know, Europe really has a very rigid labor market, so if you quit your job, because you don't like the vaccine mandates, you are dead in the water, because it's very hard to get a new job. In general, just as a baseline incident rate in the US, you know there's a little bit more flexibility and I wouldn't say that this is, you know, going to be a huge driver, whether or not the mandate work, so I just want to say that it's important to recognize that leaving your job is as much bigger deal in Europe to us, so the vaccine mandates will be that much tougher to avoid in Europe and off sort of the beaten path of what people typically focus on.

VO: With the countervailing currents of rising vaccination levels and the spread of Delta, economists will continue to monitor crucial signals for signs of progress or deceleration. For the United States, Herzog shared some of the key data points he will be watching in the months ahead.

Herzog: Yeah, the key data points I'm following larger revolve around growth expectations and the Federal Reserve, the Federal Reserve all of define a little bit more in a minute because it's a little bit of a broad topic, but I can narrow it down so for growth we've seen over the past few months are real downgrade and growth expectations and I, and I think at this point, it is largely have not fully discounted markets.

But you know we can still see new data that discomfort that thesis so personally i'll be watching employment data and higher-frequency spending data-- more fundamentally, spending data that comes from, say credit cards spending data about retail sales just to give an idea of how confident people are about going out and spending and the impact of some government programs to kind of support incomes legally for low income families, like the child tax credit.

The Federal Reserve issue that I'm really following is the interplay between how the Federal Reserve will be either ahead or behind dynamics and inflation, so if the Fed decides that it is going to let inflation creep up in order to spur a little bit more growth and take the risk that expectations rise, a little bit.

VO: As we mentioned earlier, the rise of Delta was an unwelcome surprise in a world weary of the COVID-19 pandemic. In summing things up for our listeners, Herzog shared what he considers two other major surprises from Chapter 2 of the pandemic:

Herzog: I think two surprising things have been said to me on the technological side of the first, I think, is how willing, people have been to embrace new technologies that substitute labor for capital, so if you can think of an Amazon store, although they're not prevalent, but you can think of automatic checkouts, QR codes in restaurants for menus. All these small innovations add up to some labor saving and the pandemic has kind of been like a mass a coordinated effort by everyone to test out our use of these technologies which existed before, but nobody really jumped on the bandwagon us, and once we did, they're showing up to be impactful and one of the concerns we have is harking back to that 11 million roughly you know that's a rounded up number of job openings you know how much of that is businesses steering more technology towards you know saving on employees, and this will have an impact on productivity is accessible, so we have very productive economy, we will have lower inflation, I mean lot of strong growth and maybe some limited outlays for certain types of Labor but you know inflation will be kept at bay.

On the other side if we end up with poor productivity, maybe these technologies, maybe the technological adoption is really just a short-term fix and other pressures come to play if productivity is poor, in the medium term, we will see higher inflation and that will be a complication for the Fed.

And the second surprised the elements, you know really it's that I think is that we're experiencing something of a cultural revolution in the digital space, you could say maybe it's because of zero interest rates search for yield could be because of inequality, it could be because of just new access to technologies and some of it is like our modern version of the Tulip mania but you know, society has really embraced things like digital currencies and digital artwork, , as of course crypto currencies and non fungible tokens and the prevalence of it in society and the use of it is has been much more rapid than I would have thought say you know six or six months ago, or a year ago.

VO: It’s quite clear that the pandemic has spawned a great deal of change, economic and otherwise, and we’ll stay in touch with Jeff to see where things may be headed next. Special thanks to Will Andrews for writing this episode.

If you'd like a transcript of today's podcast or have any further questions on the topics covered today, please contact your Lord Abbett representative.

I’m Tony Fisher. Thanks for listening.

VOICEOVER: Subscribe and rate us on Apple Podcasts, Spotify, or your favorite streaming app of choice. Thank you for listening.



Important Information

A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.

“Fed” refers to the U.S. Federal Reserve.

A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored on a digital ledger (blockchain).

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