Vaccination rate differential poses threat to global economy
The outbreak of the new Omicron variant in Southern Africa has not only seen global stock markets fall and flights suspended from that region into many countries.
It has also refocused attention on the issue of the lower vaccination rates in different parts of the world. South Africa’s is around 27 percent, and other countries among the nine affected have considerably lower rates.
Around 80 percent of the eligible population in Advanced Economies will be double vaccinated around the end of this year, based on current rates. By mid-2022 these populations will be close to be fully vaccinated.
For the Developing World, these 80 percent and full double vaccination thresholds are, at best, a full year behind – not scheduled to be reached until towards the end 2022 and mid- 2023 respectively.
That twelve-month differential could be critical to the world economy. The downside risk to the richer economies of not helping developing economies catch up more quickly – and to end this pandemic faster than current trajectories suggest – is about 1 percent of world GDP – or around US$1600bn – over the next year and a half.
Globally, two-thirds of those people double-vaccinated live in Advanced Economies, including China. But this equates to only about 42 percent of the world’s population aged 12 years and older.
Just like the World Economic Forum’s Global Risk framework is a basis to understand the economic impact of an ‘event’ – a large-scale change to how we work and live – or a threat, Advanced economies should be now considering the probability and consequences of another major variant materialising before developing economies become fully vaccinated.
The Omicron outbreak is another reminder of the urgency of the situation. The risk of more dangerous variants is real and, given recent history, we also know the economic and social consequence is likely to be high.
The opportunity exists for the double vaccination pathways of Developing Economies to be pulled much closer to Advanced Economies – but it is fraught with practical obstacles.
KPMG has modelled a best-case scenario where excess vaccines are fully utilised in the month they are produced, and the vaccines are shared on a one-to-two basis between Advanced and Developing countries. In this analysis, Developing economies are able to reach 80 percent and full double vaccination rates in second and third quarters of 2022 respectively.
This scenario would ask a lot of Advanced Economies, including to limit the take-up of booster shots until later into 2022; to reallocate “excess” vaccines from their stockpiles to those countries in need; and importantly it would also need those countries to help improve the supply chains and health systems of Developing Economies to ensure the efficient delivery of vaccines into the arms of the unvaccinated.
Even if this scenario could occur, the economic boost generated by bringing the vaccine pathway forward for Developing Economies is only about US$600bn, or 0.1 percent of World GDP.
This potential upside benefit is relatively low because most Advanced Economies are already opening-up and returning to pre-COVID levels of activity and trade. However, if we run a scenario where another concerning variation of COVID-19 appears so the pathway out of lockdown takes longer, then the world economy would go into reverse again, albeit by a lesser amount than was experienced in the June quarter of last year.
If restrictions only started easing when the double vaccination rate reaches 90 percent of the eligible population, and we allow for a slower glidepath out of shutdowns, world GDP could be around US$1.5trn – US$2trn lower over the next 18 months compared to our current forecast recovery path.
And as for Australia? The downside risk scenario is even starker, reflecting our position as a small, open economy dependent on world trade.
In a scenario where another dangerous variant emerged in Developing Economies due to limited access to vaccines – or Omicron takes hold – and globally supply-side restrictions were reintroduced and lifted only gradually, world trade would be significantly hit.
Australia’s GDP would be around $30bn lower between now and the end of 2022 compared to our current central case forecasts. Unemployment would push back up over 6 percent and take until the end of next year to return to current forecast levels.
Overall, there is a real economic benefit for rich countries to support initiatives like COVAX to supply vaccines to poorer nations to hasten an end to this pandemic. The price of such goodwill might not be small, but the cost of not doing could be substantially larger.
This article first appeared in the Australian Financial Review