2021-2022: Vaccine economics

Following the sharp Q3 rebound in economic activity, the rollercoaster ride continues at the turn of 2020/21. The resurgence of Covid-19 cases and fresh lockdowns will bring global economic activity to a standstill, with the quarterly rate slowing to +0.1% q/q in Q4 after +7.3% q/q % in Q3. The double-dip in Europe and marked slowdown in the US mean things will get worse before they get better. Recent breakthroughs on the vaccine front have led us to revise up our forecast for global economic growth to +4.6% (+0.2ppt) in 2021, and to +3.8% in 2022, as the policy mix remains supportive for another two years. 2023 may be a reality check as countries shall return close to potential growth, revealing who seized or wasted the crisis.

In mid-2021, despite the sizeable hurdles on the demand (vaccination skepticism) and supply sides (production & distribution bottlenecks), we expect the vaccination of vulnerable populations (20-40% of the total) to be completed, setting the stage for a buoyant growth rally in H2 2021. We should also stress the upcoming sizeable base effect in Q2 2021. Vaccine economics is about confidence restarting the service economy, recoupling (trade in goods are already back to pre-crisis levels, services and tourism should follow suit by 2022), forced and precautionary savings to be consumed in part and corporate investments to resume. Economies with delayed or limited vaccine access – notably in the emerging world – may lag behind. In the end, risks related to sequencing, and transitions (stop-and-go on the lockdown, politicization of vaccination campaigns, policy support) prevail.

Policymakers will particularly be under scrutiny as they will continue to run the show again in 2021-22. Knowing when and how to pull the plug will be essential. We expect policymakers to step up support to keep a lid on long-term scarring to the economy and provide a tailwind to the recovery. On the fiscal side, in Europe, safety net measures look set to be extended beyond mid-2021, albeit in a more targeted and cost-effective way, while in the US stimulus spending will be stepped up by another EUR900bn in 2021. Central banks will continue to act as buyers-of-last-resort to the public and the private sectors to ensure favorable refinancing rates, with the Fed and ECB maintaining record-low interest rates until at least H2 2023. This will be justified by contained inflation dynamics (moderate inflation overshoot in the US after H2 2022) as oil prices are expected to remain below 55 USD/bbl on average until mid-2022. On the other hand, the accelerating global economic recovery could see Chinese authorities already withdrawing policy support in H1 2021, with focus shifting to mitigating long-term risks. Catalysts for economic and financial turbulence include unsuccessful fiscal pivoting, unnecessary regulatory and macroprudential pain points and mismanagement of growing insider/outside divide. In the medium-run, a debt and liquidity overhang will create needed and heated debates, especially in countries with elections looming ahead.

Financial markets have been pricing in all possible good news - and more. However, competing scenarios of a post-pandemic economy are reflected in prices of safe and risky assets. We expect a slight increase in yields due to reflationary expectations. This will put pressure on already stretched equity valuations, leaving investors with an uncomfortable double asymmetry: changes in earnings expectations remain skewed to the downside, while changes in long-term yields are skewed to the upside.

In the real economy, cyclical sectors (including energy, metals, automotive and retail) to see strong catch-up growth as soon as Q2 2021 as the recovery starts to unfold and economic uncertainty recedes. Meanwhile, Covid-19 sensitive sectors (including accommodation, food services and transportation) will outperform markedly from H2 2021 onwards. Despite the favorable momentum, the scars from the 2020 hit on turnover and profitability will take time to heal. We expect the majority of sectors to return to pre-crisis levels of turnover and profitability only by early 2022. Oversized balance sheets pose some concerns. As policy support is gradually phased out, expect a delayed wave of insolvencies to surface: we expect a significant increase of +25% y/y in 2021 and +13% in 2022.


Ludovic Subran
Allianz SE
Eric Barthalon
Allianz SE
Alexis Garatti
Euler Hermes