Five Reasons to Be Cheerful

Rapidly rising case numbers, fuelled by the Omicron variant, have once again dampened hopes that the COVID pandemic would shortly come to an end. In the meantime, lingering supply-side bottlenecks, still-high inflation and fading policy support are further derailing expectations for global growth next year. Against this backdrop of gloom is there anything about the global economic scene at present to be positive about?

In the spirit of the current holiday season we'd suggest the answer is yes. In what follows we offer five specific reasons to be a little more cheerful about the outlook than some of the more gloomy commentators might suggest.

1. The Omicron variant does not (yet) to appear to be as harmful as prior strains

The first reason concerns the Omicron variant. To be sure the emergence of that variant is clearly inflicting some damage to global economic activity via stricter social distancing measures, ebbing mobility and heightened consumer fear. However, although Omicron case numbers in South Africa have surged in recent weeks, there has not yet been as much follow-through (yet) into hospitalizations relative to previous strains. What's more there has even less follow-through so far from hospitalizations to fatalities (see chart below). The same is true incidentally from an analysis of other countries that have seen a surge in Omicron cases (e.g. the UK).

It's still far too soon to draw strong conclusions from this but at face value – and at present - this suggests that this strain of the virus, while more contagious, may not be as harmful as previous strains.

Figure 1: South Africa has seen far few hospitalisations and fatalities from Omicron relative to prior strains

2. People are adapting

A second reason to be more cheerful concerns the ability of people to adapt in the wake of heightened fear about the virus. Straightforward examples include the global trend toward internet shopping and working from home. But – as we discuss again below – they also include the adoption of new technologies much sooner than would arguably have occurred were it not for the pandemic. Partly as a result of this adaptation, it is no coincidence that global economic uncertainty – as measured - is much closer to normal relative to the early months of the pandemic in 2020 (see figure 2 below).

Figure 2: Global Economic Policy Uncertainty has declined toward more normal levels in recent weeks

Calculated as an unweighted sum of the policy uncertainty data from Australia, Canada, Europe and the United States.

3. Expectations are low

A third reason to be cheerful concerns expectations. As every student of economics is aware – not least when considering the outlook for financial markets – expectations matter! Economic data surprises – the gap between the outcome for an economic data point and the average (or consensus) forecast – share a high correlation with financial market outcomes. And based on an analysis of those data surprises in recent weeks it seems to fair to conclude that expectations for global growth in the period ahead are presently quite low. As figure 3 below suggests the incoming economic data in recent weeks has shown a high proclivity to disappoint expectations on the downside. Unsurprisingly that's fostered some downward revisions to the global growth outlook in the year ahead. Expectations in other words have been re-set to a reduced level. The incoming economic data in the period ahead will therefore have a much lower bar to cross.

Figure 3: Negative global growth surprises have been in vogue in recent weeks

4. Supply chain disruption may be easing

A fourth reason to be cheerful concerns the latest evidence about supply-side congestion. There is still an active debate at present about the specific reasons why inflation has surged over the last several months, and not just in the US. Some have focused on demand-side reasons and the ample fiscal and monetary policy support in particular that buttressed asset prices, balance sheets and disposable incomes. Others have dwelled on supply-side reasons and the congested channels that have been invoked by the COVID pandemic. But as every student of economics should be aware both the demand and supply-side of the inflation equation matter. On the demand side moreover, both fiscal and monetary policy support are now fading from the calculus. Perhaps even more significantly, there has been tentative evidence of late to suggest that supply-side congestion is easing as well (see figure 4 below).

Figure 4: Purchasing managers' surveys suggest suppliers delivery times have shortened a little

5. Technology spending has a spring it its step

A final reason for optimism concerns spending on technology. As noted above, the COVID pandemic has generated shifts to behaviour that have necessitated an acceleration in digitization and automation. The modus operandi of many companies as well as many households has changed. As a result of this, potential productivity efficiencies that were lurking beneath the surface prior to the pandemic have been uncovered and magnified far more swiftly than might have been expected in the absence of the pandemic. The most obvious example of this is the breakthrough vaccine technology that was uncovered to fend off the virus, technology that may well trigger further efficiencies in health care in the coming months. But examples abound too in other areas of the healthcare sector (via online consultations), in construction (via the adoption of digital construction methods), in information and communications (via increased demand for digital services such as cloud computing and videoconferencing facilities), in retail (via an acceleration of e-commerce activity, and in banking (via a shift to digital channels and contactless payments). Finally there is very little evidence at present that suggests this expenditure on technology will dwindle in the immediate months ahead (see figure 5 below).

Figure 5: US Empire State Survey shows solid corporate expectations for technology spending

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.