investment insights
Going viral: the EU’s vaccine rollout
Lombard Odier Private Bank
Key takeaways
- The EU’s economic growth should accelerate as vaccine supplies increase and we forecast GDP expansion of 4.3% for 2021
- Vaccine supplies are set to accelerate from 100 million doses to 360 million in Q2
- EU member states and the Commission are poised to set out new spending projects
- As EU vaccine doses ramp up, we see opportunities in value sectors such as industrials, materials, select financials and some energy stocks.
The European Union is on the verge of accelerating Covid vaccine deliveries, creating immunity across populations. That sets up the precondition for the eurozone’s core economies to rebound to their pre-pandemic levels early in 2022.
The race between the virus and vaccines depends on inoculating enough people to stop new strains creating new outbreaks. At the national level, many absolute rates of infections and mortality across the EU are lower than the US and UK. The pace of EU vaccinations has lagged since the start of the year with supply problems and intermittent vaccine safety concerns. Vaccine delays are as old as vaccine technology. This week Christie’s will auction a letter from Dr Edward Jenner to a doctor in London, apologising in June 1801 for a delay in vaccine supplies. Dr Jenner was a pioneer of smallpox inoculation, the world’s first vaccine.
The EU’s fortunes are about to change as supplies are expected to increase significantly from around 100 million doses in the first three months of the year to commitments of about 360 million doses in the second quarter. That is enough to inoculate fully more than 207 million people, or just under half the EU’s population before July (see chart). As of 4 April, it reported that total first vaccine doses among adults was a median 16% across the bloc.
For now, inoculations across the EU’s largest members, Germany, France and Italy, are not yet half of the US’s, and less than one quarter of shots in the UK. As we publish, the UK has vaccinated 47% of its population with at least one dose and the US rate is 35% of adults. That compares with 15.5% in France, 14.8% in Italy, less than 15% in Germany, and 12% in Switzerland.
Political stakes
The UK has recorded the highest Covid mortality, proportional to its population, in Western Europe at 1,896 deaths per million population. But Mr Johnson’s approach to vaccination has been largely successful, allowing the Conservatives to expand their lead in approval ratings over Labour. As the UK exits another round of regional lockdowns, much of Western Europe is experiencing a third pandemic wave.
There are already political consequences. Germany’s management of the Covid pandemic is increasingly criticised. In October, the country will hand over to a new head of state after 16 years led by Angela Merkel. Infections there have risen and the country’s regional decision-making model has come under pressure, with threats that the central government in Berlin will coordinate regional vaccination programmes.
A year from now French voters choose their next president. Emmanuel Macron’s chances of being re-elected for a second five-year term will depend largely on voters’ judgement of his pandemic management. Marine Le Pen, leader of the far-right Rassemblement National party, hopes to capitalise on populist dissatisfaction similar to messaging in 2016 that swept Donald Trump to office in the US and UK voters to back Brexit.
A little more than a year after the pandemic began in the EU, four vaccines by AstraZeneca plc, Pfizer-BioNTech, Moderna Inc. and Johnson & Johnson, are available. Regulators in the EU have approved AstraZeneca’s vaccine after a series of national-level suspensions in March. A number of national regulators have limited the firm’s vaccine to older groups after questions over blood clotting in younger populations. Of the 360 million doses committed for the second quarter, 200 million are expected to be supplied by Pfizer.
Growth projections
Delays in rollout have translated into direct economic impact as the third wave forces more economic restrictions, including another nation-wide lockdown in France. Nevertheless, economies have proven remarkably resilient, with monetary and fiscal support. Growth in France is expected to accelerate in the second half of this year, for a full-year expansion of 5.5%, according to the Banque de France. Germany’s Bundesbank forecasts economic expansion of 3% for 2021, while the Banca d’Italia expects growth of less than 4%. Data in March showed that the eurozone’s services sector, while still in contraction territory, is nonetheless improving.
At this pace, we believe that the EU will return to its pre-Covid levels of output in early 2022. We expect the region to record a 4.3% acceleration in gross domestic product this year.
That compares with a mid-2021 recovery to pre-pandemic output in the US and 6.0% full-year growth, while China should post a 9% rise in GDP this year. In the UK, where the initial pandemic impact was greater and GDP declined 9.8% over the year, the expected rebound will also look more robust.
The International Monetary Fund increased its forecasts for global economic growth last week for the second time this year. The world economy may expand by 6% this year and another 4.4% in 2022, compared with a 3.3% contraction in 2019, the Washington-based Fund said. The increases come mostly from planned infrastructure and Covid spending announced in both the EU and in particular, the US.
Spending plans
In July last year, the EU’s leaders agreed a EUR 750 billion pandemic fund. For the first time, the deal allows the European Commission, the bloc’s executive, to shoulder debt on behalf of the 27-member states, potentially reducing the cost of borrowing for poorer nations in the union. The package, which equates to 5.6% of the EU’s GDP, is nevertheless running into political squabbles over its distribution. Member states have an end-April deadline to submit their initial spending proposals to the European Commission.
The issue is the speed of spending, and whether it can be distributed quickly enough to support pandemic-damaged economies. The majority of the support will be paid out in 2023 and 2024 in line with the EU’s seven-year budget spending programmes.
The US has pledged USD 1.9 trillion in pandemic support payments, backed up by plans for infrastructure and job spending worth another USD 2.2 trillion, with Federal Reserve pledges to leave interest rates unchanged until 2023.
The EU is now poised to record a rapid acceleration in Covid vaccinations. That positions Europe’s largely export-driven businesses to benefit from the wider global economic improvements. In particular, European industrials, materials, select financials and some energy names may all offer investors opportunities in the broad shift from growth to cyclical and value stocks.
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