The increase in the delta variant brings new uncertainty into the economic recovery

LONDON – The rapid spread of the Delta variant has clouded growth prospects, strategists warn, but it’s too early to say how markets will react.

France, the Netherlands and Spain announced new restrictions on Monday to curb the rising cases of the highly transmissible variant, while the UK pledged to lift the final stage of the Covid restrictions on July 19, despite rising cases.

In a research note on Monday, Oxford Economics highlighted that the number of countries reporting delta variant sequences has risen to 89, although global Covid cases remain relatively low, with a growing number now identifying them as the dominant burden . It has been found in more than 100 countries.

Ben May, director of Global Macro Research at Oxford Economics, said market concerns about the impact of the variant on the global economy were “legitimate” and warned that vaccines alone would not ensure a smooth path to economic normalcy.

May said the sharp surge in the UK, where the pace of vaccine adoption has been a noted success, could indicate that the new strain will be “devastating” with less advanced vaccination programs in emerging markets.

He suggested, however, that given the relatively low hospitalization rate, “waves of exit” could be a “necessary evil” for economies planning to reopen without the majority of the population having full immunization coverage.

“Still, economic gains could prove illusory as the economy reopens and cases spike, when Covid-related absences lead to greater disruption for businesses, and higher cases lead to greater voluntary social distancing,” May added.

“Current developments in the UK may provide more insight into this risk. But for now the evidence is inconclusive.”

More mutations, dwindling data

Barclays Head of Economics Research Christian Keller also admitted that developments around the variant brought new uncertainties on the way to economic normalization.

“This comes with surprising data suggesting that US growth has peaked and activity in China has slowed more than intended,” he added.

He noted that in the US, geographical segregation poses unique challenges in the introduction of vaccines, which could also have an international impact on the economy and markets.

“While vaccination rates are high for the US average, they remain very low in many southern and central states, suggesting that hospital stays and death rates in these regions could indeed increase significantly,” said Keller.

“A more general concern is that rising infection rates, if not fatal, could encourage the emergence of new variants that eventually become more resistant to existing vaccines. India reports a ‘Delta + variant of the variant’ and Peru’s new ‘Lambda’. Variant has also been identified by the WHO. “

Even if such mutations don’t significantly increase mortality or hospitalization rates, they could affect consumer confidence, and thus private demand and labor supply, he suggested.

However, Barclays insisted that even if the acceleration in global growth ends here, it should remain resilient. Keller also stressed that policymakers are taking note of the renewed risks as China’s central bank cuts its reserve requirements and Barclays expects other central banks to consider restrictive tendencies.

“Considerable scope for relaxation”

JPMorgan analysts suggested in a note Monday that the relative retreat for stocks “reopening” over the past few months and falling hospital admissions in the UK suggest the market may be well positioned to weather the storm if the rise in the delta is causing greater macroeconomic damage than initially expected.

“Even if the restrictions return, this might not come as a big surprise to the market, as the reopening games have lagged considerably in recent months and thus a lower level of mobility is already taken into account,” said Mislav., Head of Global and European Equity Strategy Matejka.

Matejka added that “the earnings hurdle is far from demanding,” with the consensus forecast that earnings per share on shares related to the consumer reopening in 2022 will still be up to 30% below pre-COVID-19 levels will lie.

This is in contrast to the broader market, which will be 15% ahead and which Matejka said has “significant headroom to rebound”.