BlackRock Investment Institute

Macro insights

Vaccinations, virus dynamics and the economic restart

Europe currently provides the clearest example of the challenges caused by a more transmissible virus and a sluggish start to vaccination campaigns. Resulting tighter restrictions could delay the economic restart. Yet we still see the cumulative shortfall in economic activity – what matters most for asset prices – to be just a fraction of that seen after the global financial crisis. In our view, the near-term disruptions will likely be followed by a faster activity restart later and larger release of pent-up demand. The renewed dip in activity in the near-term raises the risk of scarring of productive capacities. But we see this being limited by continued policy support that bridges households and corporates across the disruptions.

A renewed surge
Covid patients in hospital per million population

Covid patients in hospital per million population

Note: Sources: BlackRock Investment Institute, with data from Our World in Data,  The European Center for Disease Prevention and the UK government, January 2021. Notes: The chart shows the level of Covid-related hospitalizations relative to each country’s population. The data may not be comparable across countries due to differences in definitions and measurement of data.

The relationship between restrictions and economic activity seems to have changed since the first peak of infections. Our research shows restrictions are likely to be broadly on par with their peaks last spring yet the decline in economic activity is expected to be more muted, for two reasons. First, activity in many services sectors is already compressed relative to pre-Covid levels, with less room to decline compared with the first half of 2020. Second, businesses have, to the extent possible, already adapted to an environment of social distancing. Many have built out e-commerce channels and contactless processes, allowing operations to continue despite restrictions.

Recent macro insights

Spending mix key to inflation
U.S. consumers are spending more, last week’s U.S. personal consumption data show. But goods spending is not rising as quickly as it was last year.
Tighter conditions
U.S. financial conditions have tightened a lot in the last six months – in other words, financing is becoming more costly for individuals and companies
Red-hot goods inflation slows
High inflation is largely due to the massive pandemic-induced shift in consumer spending toward goods and away from services, in our view.

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