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Three scientists…
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ARTICLE TYPE
Insights
TOPIC
Macro,Opinion
PUBLISHED
May 19,2021
READ TIME
3 mins
AUTHOR
Serdar Kucukakin
SHARE
Back
ARTICLE TYPE Insights
TOPIC Macro,Opinion
PUBLISHED May 19,2021
READ TIME 3 mins read
AUTHOR Serdar Kucukakin
SHARE

A chemist, a physicist and an economist are stranded on a deserted island with only one can of beans to eat. After a while they get hungry and they want to eat the beans, but they don’t have a can opener. The chemist says: “If we heat up the can at this exact spot then the can will pop open”. The physicist says: “No, we should climb on that rock over there and drop the can. The can will reach a certain velocity before it hits the ground and that will be enough for it to open. Eventually the economist says: “No, no you are both wrong. What if we just assume that we have a can opener?”

 

We economists make implicit and explicit assumptions all the time. Our forecasts are based on these assumptions. The most known assumption lately is countries reaching herd immunity at the end of Q2/Q3 because of vaccination efforts. Though, on a global scale it really depends on what you are exactly assuming or looking at. Various mutations of the coronavirus leads virologists to debate when herd immunity can be achieved exactly, but given the fact that I am not a virologist I am refraining from this discussion. I am thus explicitly making an assumption here….

 

If your assumption is referring to the importance of countries in the global financial system, then group immunity is possibly up for grasp at the end of Q2/Q3, because the financial system of Western countries, on average the front runners in the vaccination efforts, is surely many times more developed and bigger than that of many emerging economies. Rough estimates put the global financial sector around USD 22.5 trillion, while the total market capitalization of the global banking system was estimated to be around USD 8 trillion at the end of 2019. According to Tier 1 capital China has the biggest banks, with the US and the UK taking the second and the third spot, followed by other Western and Chinese banks.

 

However, if your assumption is that significant parts of the global economy according to GDP will reach group immunity at the end of Q2/Q3, then this assumption is up for debate. The share of countries that will reach herd immunity at the end of Q2/Q3 (US, UK, EU-countries, Canada, Israel, United Arab Emirates and several other smaller economies) will most likely be around 50% of the global GDP.

 

I am using Q2 and Q3 interchangeably here, but for economic developments it makes a big differences if you are reaching herd immunity at the end of Q2 or Q3, because of the remaining time to make up for the loss in the pre-group immunity months of the year.

 

Third, if your assumption relates to the share of global population, then this assumption was according to me right from the beginning a heroic one. There is a difference between a vaccine becoming available and a vaccine actually being available to all 7.7 billion people in the world. The share of the countries mentioned above in the total world population is just around 13%. So much for herd immunity. The two countries that could make a real difference here are China and India, but as of May 14 only 26.45 and 13.02 doses per 100 people were administrated in China and India respectively.

 

Regardless of what your assumption is on a global level, in the end there are three groups of countries, roughly speaking: the first group of countries could probably reach herd immunity at the end of the first half of the year. For the second group of countries end of Q2 looks like too ambitious, but most probably will be successful by the end of Q3. The third group will most probably not reach herd immunity by the end of Q3. Some countries may even not reach group immunity by the end of 2021.

 

In the third group emerging and developing economies are overrepresented, while the second group is largely an European gathering. The front runners in the first group are ironically also emerging economies: Israel and United Arab Emirates. The UK and the US had a very swift start of the vaccination campaign and are ahead of for example the EU. Looking ahead it will all depend on if they can keep up the pace of the vaccination program. The ambition is that in the US by July 4, Independence Day, 70% of the population will have had a first dose, and with 62% being fully vaccinated.

 

The vaccine is clearly distinguishing between haves and the have nots so far. Or to put it differently, my assumption is that from the perspective of global GDP and especially global population, the economic recovery this year is going to be a subpar economic recovery of the haves. COVID-19 will thus continue to dominate the economic developments in many countries this year.

 

I started with a little joke about economists, let me finish off with some wise words about economists by late US president Harry S. Truman. President Truman once said he wants an economic adviser who is one handed. Why? Because normally the economists giving him economic advice state, “On one hand and on the other...” I wonder if there is a difference between right and left handed economists, because I am left handed.

More about the authors

Serdar Kucukakin Senior Sovereign Research Analyst

Serdar Kucukakin is a senior sovereign research analyst and is responsible for sovereign analyses of Central European countries and the Middle East.

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