As the virus has changed, so has its relationship to the economy
From The Economist, September 1, 2021
IT HAS BEEN a summer of unpleasant surprises for the world economy. America, Europe and China are growing more slowly than investors had hoped. Consumer prices are rising uncomfortably fast, especially in America. Even in the euro area, used to tepid inflation, prices in August were 3% higher than a year earlier, the highest in a decade. Economies are troubled by shortages of parts and labour, slow and expensive shipping and varying lockdown measures.
The spread of the Delta variant is to blame, but the way the pandemic is affecting the economy is shifting. The world has become accustomed to the virus battering growth, as waves of infection cause a sudden stop in economic activity and prices to moderate or even fall. The Delta variant, by contrast, looks like a stagflationary force that saps growth less dramatically but sends inflation up.
Delta is weighing on consumer spending in the rich world rather than bringing it crashing down. In countries with lots of vaccine, the link between more cases and less mobile consumers has weakened. Europe’s service sector has reopened amid its Delta wave. Consumers are less scared of the disease even if there are enough unvaccinated people to fill up hospitals.
A year ago the number of diners in American restaurants was nearly half the level in 2019. Now service is about 10% down, even though hospitals are three times fuller. In Japan a state of emergency in Tokyo does not seem to be keeping consumers away from the shops. Only in countries with draconian policies aimed at eliminating the virus are people stuck at home. Australia and New Zealand face new recessions as a result of their lockdowns and China’s service sector appears to be shrinking.
Meanwhile, the spread of Delta continues to interfere with the global supply of goods just as consumers, especially Americans, are intent on buying more cars, devices and sporting gear than ever. Outbreaks in South-East Asian countries with low rates of vaccination are causing production plants and logistics networks to shut down temporarily, prolonging the disruption to supply chains. In America retailers, including GAP and Nike, have lobbied the White House to donate more vaccines to Vietnam, so crucial have its factories become to their businesses. Shortages are driving up prices.
The changing relationship between the virus and the economy has implications for policymakers. They will not be able to repeat the trick they used earlier in the pandemic of restricting mobility to contain the spread of the virus, while unleashing stimulus to create a compensating boom in demand for goods.
A service-sector revival is now the only quick route to fast growth because that is where the slack is. In the second quarter of the year spending on services by American households was about 3% below its level in 2019 in real terms. Should the spread of Delta interfere with service industries such as leisure and hospitality, more stimulus will only create more inflation.
It is also harder to argue that fear of the virus scares consumers off spending, and that government restrictions to slow the spread of disease therefore have little extra economic cost. A weaker link between cases and mobility and the necessity of service-sector growth raises the cost of lockdowns. If pressure on hospitals causes even highly vaccinated countries like Britain to restrict services over the winter, the economic damage will be large and the benefits smaller. The Delta wave may subside soon, easing the pressure on the world economy. If it does not or another variant takes its place, the trade-offs involved in fighting the virus will become harder to justify.