The vaccine rollout has proceeded relatively smoothly, with the US and Europe leading the charge and enjoying a strong rebound in services activity over the summer. The rest of the world is expected to catch up over the next year. The main disappointment is that herd immunity is proving elusive.
Virus cases remain stubbornly widespread, even in some countries with relatively high vaccination rates. The good news is that most of the vaccines are proving successful against serious illness and hospitalisation; the bad news is the dominant and more infectious Delta variant has spread rapidly, especially among the unvaccinated. There are also a number of uncertainties around how effective the vaccines are against transmission and whether efficacy wanes over time. This is leading some countries to deploy a booster shot.
For now, we are left with a range of restrictions across the world and limited visibility on when international travel and tourism will normalise. With continued COVID-19 concerns, this removes the upside risk of a synchronised global boom into year-end.
The biggest downgrade to our growth outlook has come from China, which continues to deploy a zero-tolerance approach to the pandemic, while at the same time experiencing stress in its property market. Targeted restrictions have been necessary to keep recent outbreaks at bay; this is likely to weigh on growth through the rest of the year.
US growth, while still decent, is not looking as spectacular as hoped, with COVID-19 delaying a return to many offices and some evidence that consumer behaviour has become more cautious, especially in states with relatively high rates of hospitalisation.
US core inflation has been even stronger than we expected, and the continuing supply disruptions seem likely to keep inflation firm into the year-end.
While there is more uncertainty around inflation than usual, it still seems likely to move back close to target next year as these effects unwind. Labour shortages should ease as enhanced unemployment benefits expire, but the risk remains that underlying price pressures build as loose policy and excess saving fuel robust growth through 2022. The Federal Reserve seems on course for tapering by the end of the year, provided the pandemic does not undermine the labour market recovery.
No ‘Green New Deal’
The US Congress is considering the next round of fiscal stimulus, which is split into two parts. The first is a bipartisan infrastructure bill ($550 billion of new spending), which contains some green elements such as low-carbon technologies in new port and airport infrastructure. There is also around $15 billion for electric buses and a nationwide network of plug-in vehicles, with plans for an expansion of renewable energy as part of $60 billion to rebuild the electric grid. Around $21 billion is for cleaning up mines and brownfield sites.
The second part (up to a maximum of $3.5 trillion spending and $1.75 trillion of deficit funding over 10 years) will require unanimous consent among Democrats in the Senate to pass. This yet-to-be-negotiated spending could contain some green stimulus but is likely to fall way short of the ‘Green New Deal’ advocated by Bernie Sanders on the campaign trail.
These new proposals collide with the need for Congress to increase the debt ceiling and approve regular government spending as the US heads for a potential political showdown towards the end of this month.
In addition, they compare unfavourably with the sums the EU has recently made available for the green transition, in the form of grants and loans to member countries: more than a third of its €750 billion recovery fund and a €17.5 billion Just Transition Fund. That said, these initiatives are also unlikely to be enough to combat the climate crisis in time, meaning that much of the heavy lifting will need to be carried out by the private sector.