Will the Delta variant halt global economic recovery?

The hopes for recovery from the pandemic fell flat with the resurgence of the new Delta variant. As the new Covid-19 cases rise across the globe, market investors and economists fear sloppy economic growth.   

First identified in India, Delta is now dominant in the U.K. and several other countries, including Germany, Italy, and France. According to the World Health Organization (WHO), the variant is detected in 96 countries. The U.S. Centers for Disease Control and Prevention has classified it as a variant ‘of concern’ and said delta accounts for 20% of all covid cases in the U.S.  

There has been uncertainty and doubts over the economic recuperation ever since the delta made its way.

A week ago, IHS Markit survey of American businesses reported that the new variant played a part in weighing on June factory output, particularly “in various emerging Asian economies.” 

Chris Williamson, the chief business economist at IHS Markit, says, “The Delta variant poses a major risk to the outlook. Not only have rising case numbers led to a slide in business optimism to the lowest since February, but further Covid waves around the world could also lead to further global supply-chain delays.” 

U.S. Economists were earlier predicting that the Gross Domestic Product GDP) would increase at an annualized rate of around 10% in the second quarter, followed by continued strong growth through the rest of the year and 2022. With the accelerated spread of the new virus, the economic outlook remains clouded now.

 Economy and the Dollar  

The DXY (U.S. dollar index) ― measuring the value of the U.S. dollar against six major currencies ― stands at 92.54 as of July 28. The dollar has been rising steadily since June and continues to be a haven for investors. It has been doing pretty well on the foreign exchanges.  

Will it continue to rise? This will depend on factors such as government measures to combat the virus, impact on economic activities, and shift in the Fed’s and ECB’s monetary policies. Meanwhile, Britain’s Pound hit a five-month low against the dollar and traded close to a five-week low against the Euro on July 20. The Pound-US Dollar (GBP/USD) exchange rate is currently fluctuating at $1.39.

Delta variant impact on stocks 

Some of the stocks took big hits all around with the delta resurgence. Dow witnessed the largest decline of the year when it fell 725 points on July 19. It was the worst day for the Dow since the drop in late October 2020, when it fell 943 points.  

At the time of writing the report, shares of beleaguered semiconductor maker Intel (NASDAQ: INTC) were down 4%. Airline companies like Delta Airlines (NYSE: DAL) and United Airlines (NASDAQ: UAL) plunged by around 4% and 5%, respectively.   

Some stable stocks continue to remain strong and have gained. COVID-19 vaccine maker Moderna (NASDAQ: MRNA) and BioNTech (NASDAQ: BNTX) saw a 10% and 5% surge earlier this week. S&P 500 index rose 13% this year and is up 90%, compared to the lows of March 2020 at the onset of the pandemic.  

Cryptocurrencies, too, felt the effects of the drop. On July 20, the crypto market lost $100 billion in 24 hours, with Bitcoin hitting $29,600 a token and Ethereum reaching $1,700. 

However, JPMorgan’s strategists’ recently told the media that the new variant doesn’t pose a risk for markets and could boost value stocks and yields.  

“The delta variant should not have significant repercussions for the pandemic situation in developed markets (e.g. Europe and North America, which have [made] strong progress in vaccinations) due to the level of population immunity,” said the strategists led by chief global markets strategist Marko Kolanovic. 

Economy, not hurt?   

Meanwhile, the OECD’s weekly tracker of economic activities and Google Mobility Trends on Retail & Recreation in the U.S. and Europe suggest that actual economic activity has not been hurt yet. This can be attributed to the fact that governments are generally refraining from applying lockdowns this time around.

According to the European Commission’s recent economic forecasts, Britain has recorded four straight months of economic growth, and in some regions of the country, the number of employees on payroll is higher than before the pandemic.

However, the hyperlocal outbreaks in the future and constantly evolving delta variant pattern may pose a risk to businesses and the economy.

Oil futures fluctuate 

Oil prices continue to fluctuate with the Delta variant threatening demand. Futures in New York fell 0.2% on July 27 after rallying the previous four sessions. Currently, U.S. benchmark crude futures are bracing for the second monthly decline since October. John Kilduff, a partner at Again Capital LLC, says, “The oil complex is much more sensitive to Covid-19 developments, particularly when they turn negative.” 

 IMF warns of a lopsided economic recovery   

In its latest World Economic Outlook report, the International Monetary Fund stresses that the global economy is expected to grow 6 % this year. By 2022, the IMF projects global growth of 4.9 per cent, up from 4.4 per cent. For the U.K., IMF forecasts a growth rate of 7 per cent in 2021, a touch lower than Bank of England estimates. 

The report, however, warns that low vaccination rates in low-income developing countries may lead to a lopsided global recovery. According to the report, about 40% of the population in advanced economies are fully vaccinated as against just 11% in emerging markets and low-income developing economies. 

In the USA, about 68.6% of adults are partially vaccinated and only 59% fully vaccinated. This leaves millions unvaccinated, and if left, it could hamper America’s economic recovery.

“Multilateral action is needed to ensure rapid, worldwide access to vaccines, diagnostics, and therapeutics. This would save countless lives, prevent new variants from emerging and add trillions of dollars to global economic growth. The recovery is not assured until the pandemic is beaten back globally,” says IMF Chief Economist Gita Gopinath.

South Africa has only 5% of its population vaccinated. In Colombia, only 11% of the population is fully vaccinated — a lower proportion than in Chile, Mexico, and Brazil. 

The IMF also expressed concern that any significant resurgence of inflation would pressure the world’s central banks; to raise interest rates, thereby threatening the global recovery. Still, it expects inflation to return to pre-pandemic levels in most countries next year. 

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