A Patchwork Rebound Awaits Businesses Amid Continued Uncertainty

Peter Schwartz and Mick Costigan contributed to this article. 

After a month-long drop in global COVID-19 cases earlier this year, cases have risen 66% since February. We now face a severe new threat that we will not vaccinate enough people globally in enough time to outrun the spread of new strains, compounding business uncertainty. That’s why German Chancellor Angela Merkel has described this as “basically a new pandemic.” Business leaders need to recognize that recovery may be imminent, but progress will be neither linear nor consistent. 

Since last March, we’ve developed a series of scenarios to help answer the question of how the crisis might evolve and how business leaders need to prepare. The metaphor we proposed in our early February update still holds: we are in a race between the spread of variants and the progress of vaccination, and that race is now being run in earnest. The four critical uncertainties we proposed are also still useful for tracking the potential outcomes, but many new developments have changed the upside and downside prospects, both for the world as a whole and across regions. 

Business leaders now need to plan for a new range of outcomes that vary across the “vaccine champions” that are leading the race, the European countries that are having difficulty launching their campaigns, the “COVID-zero” countries in Asia-Pacific who have excelled at managing the disease, and emerging markets that are waiting in line. 

Business uncertainty #1: When will the infection be brought under control?

In February, we highlighted how control of the infection would be challenged by the increased risk from variants, aided by governments renewing strict lockdowns, and would ultimately be dependent on individuals recognizing the threat rather than giving in to fatigue. As the variant wave rises worldwide, these factors are only growing in importance. 

Increased risk from variants remains the driving concern. They have spread quickly around the world, continue to emerge at a rapid clip, and are independently developing similar adaptations. There are now five variants considered “of concern” and two more “of interest.” Greater lethality and 50-100% faster spread are the hallmarks of the much-discussed B.1.1.7, first discovered in the UK and now on the rise in the U.S. where it accounted for a quarter of new cases as of March 31st. Some resistance to vaccination has been developed by both B.1.351, discovered in South Africa, and P.1, discovered in Brazil. Lack of timely genomic analysis of new cases continues to hamper the tracking of variants everywhere but the UK. 

The renewal of strict lockdowns has begun in many countries, with Germany, France, Italy, Canada, and Australia having all recently put renewed restrictions in place. But where this would previously have been a global trend, in the U.S., where vaccination is moving quickly, the trend is towards reopening. The same is true in the UK and Israel. 

Fatigue is growing as most countries recently marked a year since the first lockdowns. Multi-month lockdowns become steadily less effective over time, according to a March study, which recommends that they be “strict and brief.” 

As a result, we see the current range of two-year prospects ranging from:

• Downside: a massive variant-driven “fourth wave” overwhelming containment measures in all but the “COVID-zero” countries in Asia-Pacific, weakened only partially where there is substantial immunity from vaccination 
• Upside: a smaller wave that is quickly contained by a strong policy and individual response in most countries, muted by existing immunity, and further reduced by vaccination in those few countries that are at the head of the race. 

Business uncertainty #2: When will we reach herd immunity?

We previously flagged the need to monitor the ramp-up of three variables: vaccine supplies, delivery capacity, and public demand. Each has seen fast-moving developments and remains determinative of the timeline to herd immunity. 

Vaccine supplies have expanded with approval of the Johnson & Johnson vaccine in the U.S. and Europe, although the acceleration has not been fast enough to date, particularly in  Europe and India which are now moving to prevent exports. But the view ahead is hopeful: production increases are anticipated to be exponential in the coming months, possibly aided by intellectual property protections being lifted that would clear the way for generics. To date, 413 million doses have been produced, and industry estimates for the end of the year range from 9.5 to 12 billion. 

The question is whether the hoped-for acceleration will materialize and how quickly the supplies can be deployed. At present, the market continues to be skewed by bilateral deals, export bans, vaccine nationalism, and vaccine diplomacy. High-income and upper-middle-income countries have secured 70% of the 8.6 billion doses currently reserved, and at least 30 countries have not yet injected a single person. 

Given the potential for such delays, it’s possible that the Economist Intelligence Unit’s estimates from late January will be accurate: that China and India will not have substantial vaccine coverage until 2022, and many lower-income countries (including Venezuela and Indonesia) will have to wait until 2023. 

On delivery capacity, where Israel and the UAE were previously the two vaccination front-runners, they have now been joined by Chile (47 doses delivered per 100 population as of March 25th), the UK (46), and the U.S. (39), where the Biden Administration set a new goal on March 26th of 200 million shots in its first 100 days. But delivery capacity will not be the challenge in getting emerging markets to join the race, according to Ashish Jha, Dean of the School of Public Health at Brown University. The constraint will be supply.

Public demand for the vaccine remains a major source of uncertainty. No new polling has been released on worldwide willingness to be vaccinated, which Ipsos and the World Economic Forum showed in December to have dropped substantially in many countries. Notably, France was at the bottom of the list with just 40% interest. One positive indication is in the U.S., where recent polling from Kaiser Family Foundation showed that from January to March nearly half of the “wait and see” group either got a vaccine or decided to get one as soon as possible, dropping from 31% to 17% over that timeframe while overall willingness stayed steady.

The deciding factor remains what can be done to bring around the hesitant. By Jha’s estimate, the “definitely not” group (13% in the Kaiser poll) split roughly evenly between those that can be persuaded and those that are firmly opposed. In that area, the good news is that best practices are advancing. Hesitancy is now understood to have a wide range of drivers, many of which are very personal, and the most effective method for overcoming them is a one-on-one conversation with a trusted local figure. While difficult to scale, that keeps the prospect of herd immunity within reach. 

Another reason for hope that herd immunity can be reached is the question of vaccines’ protection against infection. New data from the U.S. Centers for Disease Control and Prevention shows that the Pfizer and Moderna vaccines are 90% effective at preventing infection, meaning that they will not only protect the individual against the virus but also prevent that person from spreading it to others, making it far harder for the virus to make its way to those who remain susceptible. 

But it has also become increasingly clear that global herd immunity is unlikely. In the view of epidemiologist Dr. Larry Brilliant, “I do not believe for a second that the success that we are having in the United States is replicable around the world… Think about the pandemic in year three or four. There will still be billions of people unvaccinated.”

As a result, we see the two-year prospects for this uncertainty ranging from:

• Downside: herd immunity is never achieved, with frequent small city-level outbreaks
• Upside: achieving herd immunity in developed economies in early 2022, followed by a gradual build-up to herd immunity in middle- and upper-income countries over the course of 2022 and 2023, but never achieving it worldwide.

Business uncertainties #3 and #4: What is the depth and duration of the downturn and how robust is the return to growth?

As was true earlier, the three key gating factors are the strength of fiscal stimulus, household savings, and consumer confidence. 

Fiscal stimulus has improved dramatically in the U.S. with the arrival of the $1.9 trillion stimulus package. That is projected by the Organisation for Economic Cooperation and Development (OECD) to raise U.S. GDP by 3.8% in its first year and have spillover effects on most major economies that raise projections of global GDP by 1.1% versus their December projections. Economists are largely not concerned in the near term about the potential for this to drive inflation. The more important question is what happens when government support is removed: do we see renewed business dynamism or a reversion to the decline that was seen in some countries before the pandemic? 

Household savings have continued to rise, with a tally by Bloomberg Economics showing in March that savings totaled $2.9 trillion across the U.S., China, U.K., Japan and the biggest European economies. This strengthens the prospects for at least several quarters of a consumption boom, and possibly a longer-lasting “Roaring Twenties.”

Consumer confidence has not rebounded yet in the U.S., UK, Euro area, or Japan. But it has picked up in Australia, a member of the COVID-zero club, where it is substantially above the long-term average. 

As a result, we currently see the two-year prospects ranging from:

• Downside: virus challenges and poor management leading to a slower and more uneven recovery than the OECD downside
• Upside: virus luck and excellent management resulting in the OECD upside and laying the foundation for long-term growth

Our updated business baseline scenario: spring economic recovery and a patchwork return to normalcy

Our baseline business scenario is for a variant-driven wave of infections worldwide, lower than initially feared but still significant. The wave will hit unevenly around the world, limited in some places by strong containment measures, limited in others by high levels of immunity from existing infections or vaccination, and making a major impact in countries that lack either one. 

Economically, we look to the central scenario of the OECD’s March modeling. Growth will return, but at widely-varying rates around the world, with the local particulars of the health crisis the primary driver. 

The result is a patchwork world, with a small group of high-income countries attempting to return to pre-pandemic norms while the rest of the world wrestles with the accelerated spread of variants. 

This global storyline varies significantly by region: 

1. Vaccination champions beat the variants

In the few countries where vaccination drives are ramping up — the U.S., the UK, Israel, Chile, and the UAE — infections are likely to drop quickly over the summer. But even in those economies, herd immunity will remain elusive, since children will still wait for an approved vaccine, and too few vaccine-hesitant adults will be won over.

While these countries will share similar health outcomes, their economies are expected to take different paths. The U.S. stimulus will raise GDP by 3-4% in the next year, according to OECD projections. Where the U.S. will then be on track to beat pre-pandemic projections by nearly 1% at the close of 2022, the UK is expected to remain over 4% below.

2. Europe struggles to outpace the spread

As the variants take over in the coming months, European countries are likely to see a significant wave, prompting stringent new lockdowns through the spring and summer that will push the limits of public compliance and may result in substantial fatigue. Hesitancy to take a vaccine will remain a major obstacle, as will the preference to avoid AstraZeneca. As a result of these headwinds and little willingness to provide fiscal support, Europe will see a more gradual upturn than other developed economies, growing significantly slower (3.9%) than the global average in 2021 and slightly slower (3.8%) in 2022.

3. COVID-zero countries hold the line

The major exception to the main global divide will be the many “COVID zero” nations in Asia-Pacific, notably Japan, China, South Korea, Taiwan, Vietnam, Australia, and New Zealand. They are likely to maintain control, even in the face of new variants, and to ramp up vaccination. Since so few of their population have been infected, herd immunity will be totally dependent on vaccines and arrive on a similar timeline to the other group of rich countries. Having already gone through a consumption boom when they reopened partway through 2020, we expect their growth to continue at a moderate pace through the end of the year, then accelerate as the rest of the developed economies enter a new normal.

4. Emerging markets suffer but recover

Meanwhile, most emerging markets will remain short of vaccine supplies, and will not be able to secure sufficient supplies until late 2022 or early 2023. As a result, the virus will continue to circulate, imposing significant health costs and driving up the likelihood of further variants emerging. Economically, most will grow quickly in the coming 1-2 quarters, but they will remain scarred at approximately 3% below their earlier projections through the end of 2022.

Prepare for split-screen management between the pandemic and the new normal

Our advice to business leaders in February to stay alert to new developments, agile in the face of those changes, and outspoken on the importance of health precautions still holds true. An added nuance to the final point is that they will need to manage their operations very differently across the four geographies described above. Where vaccination is moving quickly, businesses are rapidly moving from following rules to making their own decisions, and employees will need clarity on when they can return to work, what safety protocols will be required, how much flexibility they will have, and how much travel will resume. Consistency and transparency will put many concerns to rest.