Jeppe Ladekarl
May 3, 2021

”Are vaccination rates a good proxy for future economic growth?”, is a question we are being asked frequently by our clients right now. The quick and dirty answer is “yes”, however, digging just a little bit deeper reveals a more nuanced picture.

The first aspect to consider, I believe, is the assumption that there is a link between the opening of the economies and the speed of vaccination. While that is generally correct, the link is not uniform. The relationship between the stringency of response and current vaccination rates differs substantially between countries and even within different parts of a nation. We have seen that here in the US, for sure. The difference between Florida and California, for example, is striking. There is some excellent data on stringency here, which can be compared with the vaccine roll-out data found here to illustrate the point that vaccine roll-out and stringency are linked, but not in a uniform fashion.

Secondly, the link between opening up and economic growth is not uniform either. There is no doubt that the speed of opening up the various economies will impact their economic trajectory. Not only will growth in aggregate be affected, but significantly, so will growth in various sectors. The most immediately impacted sectors are the ones with exposure to retail sales in the economy, specifically those some refer to as the "going out" economy (Food and drinking places, travel, sporting goods, hobby, music, etc.). Therefore, the impact of opening up on economic growth should also be linked to consumption patterns, which differ substantially between various countries.

Thirdly, even further, obfuscating the link between the vaccines, opening up, and future economic growth is the level of fiscal and monetary policy stimuli provided. Some countries, notably the US, are providing significant amounts of fiscal stimulus and continuing loose monetary policy, while having vaccinated broadly - though not yet at herd immunity levels. Which of these - vaccines, reopening, fiscal or monetary policy - primarily drive economic growth is hard to say, yet. However, the implications for financial markets are very different if current growth is driven by temporary fiscal stimulus or a more permanent opening up of the economy resulting in full employment much more rapidly than what the market is currently discounting.

This brings me to my last point: currently, the linkages between vaccines and movements in financial markets are less precise than what one could imagine. Why? Mainly because the dynamics in vaccine roll-out are well understood and priced in by the market - so much so that the re-introduction of mobility restrictions in Europe had little impact on European asset markets. For financial markets, the effect is now coming more from under- or outperformance against expectations rather than outright roll-out of vaccines.

In summary: does the speed of vaccine distribution serve as a leading indicator for the economy? Yes. However, it is a much less precise leading indicator than one might think when it comes to both economic and financial market trajectories. We have moved from the “does it have an impact”, phase, to the “what is priced in” phase when it comes to financial markets.

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