Endemic pandemic? Three-minute macro

Endemic COVID-19: an economist’s view

Everyone has questions about how Omicron will change economic outlooks. We’ve said it before, and we’ll say it again: We’re not epidemiologists, but market strategists and economists. That said, there are some realities that have become clear to us in the past (almost) two years with respect to COVID-19.

First, a more transmissible strain of the virus can affect an economy in two primary ways: through household and business behaviors (demand-side developments) or through government restrictions on economic activity or mobility (supply-side developments). There are no hard and fast rules on how to forecast these responses. There are some places where a spike in case counts didn’t lead to a significant change in business/consumer behavior or tighter social restrictions—think Florida during the fourth wave of the outbreak—and then there are other places—China, for instance—where a minute rise in infections could lead to sizable lockdowns and behavioral changes. All we can say is that the relationship between the severity of a COVID-19 variant and official responses isn’t a constant and, crucially, isn’t especially forecastable.

Second, with each new COVID-19 wave, it becomes clearer to us that we—that is, economists—need to stop analyzing the situation as a one-off economic shock in the way we would approach, say, a natural disaster, and instead shift to thinking of it as a more minor (relatively speaking) but semipermanent restraint on growth. For example, instead of forecasting how bookings for cruises might nose-dive in the months after a new variant has been identified, we might be better off assessing what an environment in which, say, 5% of all cruise passengers never return could look like. In other words, if COVID-19 waves are to be a permanent feature of life, we might need to adjust our collective mindset to what could be a new economic reality: a lower potential for growth, a structurally higher inflation (probably around 2.5%), and difficulty in withdrawing stimulus.

For now, it’s too early to make broad proclamations about what will happen next. But as economists, we’ll continue to focus on two key questions: Are behaviors changing, and are governments pursuing lockdowns? 

An economist's view of COVID-19 in the long run

The rising importance of the green supply chain

The pandemic has revealed how critical it is to have reliable supply chains. We believe that this theme will remain a crucial component of the commodity complex moving forward: As demand for transition metals (the key minerals needed for the transition to a net zero economy) rises, so too will the need to ensure the sustainability of supply chains for these key inputs. For context, transition metals and minerals include copper, nickel, cobalt, and lithium, key components of electric vehicles and batteries, which are therefore critical in a world of increasing focus on environmental sustainability.

China holds a significant stake in producing these key minerals; the country also has a stake in the extraction of several commodities that are key to decarbonization, including cobalt. Chinese investors control about 70% of Congo’s mining sector,¹ which itself accounts for 69% of world’s cobalt supply. In June of 2021, the Biden administration warned U.S. manufacturers that they might be squeezed out of the battery metals market and is actively pushing for access to cobalt supplies from Canada and Australia.

Broadly, we believe that the commodity space will be prone to increasing geopolitical tensions, and heightened price volatility could follow. An accelerated sustainability focus could shift the equilibrium price of natural resources, and countries could prioritize the sustainability of supply chains of key commodities such as energy and transition metals. We view this as an inflection point in the commodity space and, in our view, it will be a powerful force to the macro environment, particularly around inflation.

China has a major stake in transition metals

Top 3 countries' share of total refining of transition metals

Source: "The Role of Critical Minerals in Clean Energy Transitions," IEA, May 2021, https://www.iea.org/reports/the-role-of-critical-minerals-in-clean-energy-transitions.

Asia can weather an Omicron storm

There’s still a lot of uncertainty around the new COVID variant. In the downside scenario in which Omicron is as challenging if not more challenging for the global economy as Delta, the lesson from the last two years is that the services sector will likely bear the brunt of any new restrictions. That said, many businesses have adapted their operations by moving online. Meanwhile, governments have become more adept at calibrating their responses: During the recent waves in Southeast Asia, industrial and construction sectors remained open, even if at reduced capacity (as opposed to full lockdowns during the first wave).

If very tight global virus restrictions are reimplemented, we would expect rising global demand for consumer durables. This would extend Asia’s strong export performance to date, which was otherwise expected to weaken amid normalization of global consumption patterns.

Another spike in demand for global goods would also add further stress to global supply chains and inflation, but Asia’s excess supply insulates the region from an inflation spike, giving central banks room to maintain relatively more accommodative monetary settings. Finally, fiscal positions across most of Asia are in better shape than in most other emerging markets, therefore affording Asian governments the policy space to offset any hit to demand if the outlook took another sudden turn for the worse. At this juncture, we believe Asia is in a good position to take Omicron in stride.

Inflation in Asia has decoupled from other emerging markets

Year-over-year change in CPI in Asia and emerging markets (%)

1 Reuters, August 30, 2021.