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Vaccines and the economy in 2021

We now have three proven vaccines. But how quickly can they be rolled out, what will that mean for human behaviour and what are the implications for economic recovery?

The most hopeful scenario is that vaccines can be given to enough vulnerable people within weeks to head off the need for further lockdowns in Q1 2021. But this will be a close race (see below). After that, if a majority of people over 50 can be vaccinated by early spring we can (in this scenario) return to normal in Q3 2021 with economies quickly regaining Q4 2019 levels and then powering ahead. This is Tricio’s ‘Covid goes soon’ scenario and the AstraZeneca news this morning makes it much more likely.

A less hopeful one is that disappointments on vaccines, (e.g. efficacy rates decline quickly or rare complications emerge), logistical delays in rolling them out and the (considerable) possibility that vaccinated people are still highly infectious keeps social distancing in place for much longer. Around 5% of the economy could remain periodically closed or shunned and GDP might not surpass Q4 2019 levels until 2022. This is Tricio’s ‘Long Slog’ scenario.

We have favoured the first scenario for many months and the AstraZeneca news is a welcome support. But more data over time as well as results of trials of other vaccine candidates and on whether people remain infectious will be crucial.

Lower hospitalisation cuts need for lockdowns

The trigger for governments introducing lockdowns or very tight restrictions is when hospitalisation rates get too high. No government wants to be criticised for people dying without access to hospital services. The initial rollout of vaccines to old and vulnerable people (especially in care homes) and to health workers should significantly reduce hospitalisation and also help keep health staff available rather than off sick or isolating. If enough shots are available it should be relatively quick to vaccinate people in care homes and health workers at their place of work. Reaching older people living at home will be harder but they are less at risk of infection.

Lockdowns and GDP

Q3 GDP data show the US and Euro zone economies back to about 96% of Q4 levels with the UK lagging at 90%. The UK number may be misleading because it seems the ONS is applying a different method to the other countries. Nominal GDP in the UK is down about the same as in the Euro zone yet real GDP is down much more. Much of this is due to the way the public sector is treated in the accounts. At Tricio we take the view that the UK private sector is probably only 1-2% behind other economies.

Monthly data show that in October country output was ahead of July data so we estimate that by October, just before the latest lockdowns and restrictions, output was 1-2 percentage points above the Q3 average (e.g. the US at 98%, Eurozone at 97% and UK 95% of Q4 2019 levels).

The current round of lockdowns in Europe looks likely to depress GDP by perhaps 5-10% during the period it lasts. This is much less than last spring because more of the economy is staying open and people are less scared, and so less likely to cut spending. This means that with (mostly) one-month lockdowns in Europe, Q4 GDP should be down only 2-4% compared with October levels and flat or down marginally compared with Q3 averages.

In the US, infections are still rising fast in most states and more state and local restrictions, including some lockdowns, are expected in coming weeks. Q4 GDP is likely to be up on Q3 (again reflecting the rising trend during Q3), but Q1 GDP could be flat or even down slightly on Q4.

The current lockdowns are bringing down infection rates but winter weather and socialising around Christmas seems likely to see infections soar again in Q1. The question then will be whether rapid vaccination of the most vulnerable can head off a 3rd round of lockdowns after Christmas. This would probably allow output to regain October levels in the early spring. But it will be touch and go for hospitalisation rates. The vaccines so far proven require 2 shots over 3-4 weeks. If the rollout can’t get started until late January or February that may be too late to avoid new lockdowns or at least very tight restrictions throughout Q1 and into Q2.

Are vaccinated people still infectious?

This is a key question. If people not only avoid illness but also can’t pass the virus on (or it is significantly less likely), then it will be much easier to return to normal. Vaccinated people could be freely allowed into crowded venues or onto flights or cruise ships without risking other people (or themselves). But if they are still infectious then social distancing will need to be maintained for much longer. We don’t know the answer to this question yet, though reportedly the AstraZeneca study is testing for it.

'I'm vaccinated. Lets party!'

Of course, vaccines will change behaviour. Many vaccinated people will resist continued social distancing which (if they are still infectious) could mean that the illness rate among those not vaccinated goes higher for a while, making it more risky for un-vaccinated people to socialise. Hence the speed of rollout becomes very important because many people will maintain social distancing until they can get the vaccine.

There is an argument that there is no need for people under (say) 40 to get the vaccine, unless they have other medical conditions, at least until we have more data on its safety. That said, concerns about ‘Long Covid’ where after-effects of the disease can last for months suggests that many younger people will be inclined to maintain social distancing until they can get the shot. What health experts delicately call ‘vaccine hesitancy’ means that not everyone (at any age) will want one but the more people that decline to take the vaccine, the more the virus circulates.Moreover, it may be required for work or for travel which will be a strong incentive for many.

So far there is no sign of serious adverse side effects but this is based on vaccination numbers only in the tens of thousands and only over a few months. If a vaccine does turn out to cause serious side effects or fatalities, the numbers would have to be large to be as dangerous as Covid-19 itself, at least for older age groups, which seems very unlikely on current data. But Covid-19 is not that dangerous to younger people so there is a balance to be had. And many people may prefer to avoid both vaccine and social contact, with the latter not good for the economy. Again, behavioural factors come in. Just one serious side effect will get wide press coverage and may put people off vaccination even though the balance of risk is still overwhelmingly in favour of the vaccine.

Vaccine rollout timing : the 40-65 year olds are the big spenders

At first, vaccines will only be available for elderly and vulnerable groups and health workers. People in the still potentially vulnerable 40-65 age group will have to wait longer and are likely to stay very cautious. But these are generally higher income cohorts and big spenders compared to the elderly and young, so the longer they have to wait the worse for the economy. This age group are also more likely to be high-spending business travellers, bad news for the airline and hospitality industries.

The bottom line – what to watch for

· More vaccines reporting positive trial results and further data on the three so far proven.

· News about whether vaccinated people are infectious.

· Can countries start vaccinating people as early as December or at least in January. If not, there may be no chance of avoiding new lockdowns or at least very tight restrictions in Q1.

· How quickly can vaccines be rolled out in 2021? Ideally, they would reach most adults over 50 by early spring.


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