Slow vaccination rollout dooms the economy and the baht

After a contraction of 3.3% in 2020, the IMF now expects the global economy to expand at a rate of 6% in 2021, up from its prior forecast of 5.5% made in January 2021. The stronger number reflects the prospect of additional fiscal stimulus in a few major economies as well as rapid vaccination rollouts across the advanced economies. Especially for the US and UK, the economic recovery will be much faster than happened after the global financial crisis of 2008 because of unprecedented policy responses, as well as the absence of financial crises.

Among advanced economies, the US economy is predicted to reach its pre-Covid level this year as a result of President Joe Biden’s planned fiscal stimulus package and fast vaccine rollout. In March, total non-farm payroll jobs expanded by 916,000, the biggest gain since last August. As a result, the unemployment rate fell to 6%, only 2.5 percentage points higher than its pre-pandemic level in February 2020.

In addition, 21% of employed persons currently telework due to the coronavirus pandemic, down from a peak of 35.4% in May 2020. This highlights a reopening of the economy as more than 34% of the US population have been given at least one dose of vaccination. This should bode well for the services sector as people begin to return to office and get outside again.

Backed by a string of strong economic readings and brighter prospects for the economy, the US dollar strengthened during the first quarter of 2021. The US Dollar Index, which tracks the greenback against a basket of six other currencies, was at 93.30 at the end of March 2021, up from 89.87 at the end of last year.

For the UK, after contracting by a whopping 9.9% last year, the IMF forecasts real GDP growth is expected to gain 5.3% this year. The rapid rollout of life-saving vaccinations should further accelerate activity, as restrictions are relaxed and health issues are likely to disappear. Some 47% of people in the UK have received at least one injection of a coronavirus vaccine. In fact, the government expects to fully inoculate the entire population by July, and to achieve herd immunity by next week. This is quite remarkable given how badly the UK initially contained the pandemic.

These developments should continue to boost the labour market recovery, as unemployment continued to fall to 5% in the three months to January 2021. Similar to the greenback, the British pound was the second-best performer among G10 currencies, gaining 0.8% in the first quarter of 2021.

The euro-zone economy lagged way behind the US and UK because of the slower pace of inoculations, and is now dealing with a third wave of infections. Tight Covid-19 restrictions undoubtedly pushed the economy into a slowdown during the first few months of 2021. The euro-zone unemployment rate was 8.3% in February, unchanged from January. On average, the pace of vaccination is much slower than the US and UK, with only about 15% of the population vaccinated. Hindered by further lockdowns and delays to reopening, demand for the euro remained weak, as indicated by a 3.97% depreciation during the first quarter of 2021.

Back home, Thailand faces a third round of outbreaks. This wave of Covid-19 infections occurred just before the much-anticipated long Songkran holiday, leading to a number of cancellations of meetings, weddings, activities and travel plans. It is far too early to estimate the damage to the economy. We expect this wave is likely to affect the economy much more than the second wave, with a longer lasting impact.

Further adding to the woes, only 0.46% of the Thai population has been vaccinated and inoculation plans remain a shambles. Lingering concerns over the linkage of the AstraZeneca vaccine (Thailand’s principal choice) to blood clots are giving rise to scepticism about the vaccine’s safety.

During the first quarter, the baht was one of the worst-performing currencies in Southeast Asia, as its fundamentals were weakened by the absence of tourist spending or a coherent vaccine policy. The baht dipped 4.19% against the US dollar. Travel restrictions caused visitor receipts to fall to $742 million, only 5% of the same period last year. As Thailand tackles a third wave, we expect the economy to struggle and the baht to weaken to 32-33 over the next six months.