Money Magazine Australia

What if...: Annette Sampson on the vaccine rollout

As new strains emerge and many countries struggle to protect their population, we may have to learn to live with the coronaviru­s

- Annette Sampson Annette Sampson has written extensivel­y on personal finance. She was personal finance editor with The Sydney Morning Herald,a former editor of the Herald’s Money section and a columnist for The Age. She has written several books.

No vaccine is 100% effective, and while vaccinatio­n in Australia has stepped up from its sluggish start, it will take at least the rest of this year to get the bulk of the population jabbed, during which time we remain vulnerable to new outbreaks, as we have seen in Victoria, and mutated strains of the virus.

In its May budget, the government dashed hopes for normality by indicating it would be unlikely to open our borders until at least the middle of next year. And while Australia has fared exceptiona­lly well in terms of preventing mass outbreaks, we remain vulnerable to further restrictio­ns and lockdowns if the disease moves back into the community.

HERD IMMUNITY

The challenge is that to stop the virus in its tracks, most epidemiolo­gists say you need 60%-70% of the population to be immune, either through a vaccine or past exposure. But we don’t know how long immunity lasts for Covid-19 and the virus keeps mutating, so there is no guarantee that existing immunity will protect us from a “new” version of the disease.

The virus strain that hit India was just one such mutation and proved much more transmissi­ble than the original version. And the longer it takes to stem transmissi­on of the virus, the more time new variants have to emerge and spread.

To gain some idea of the problem, research published in Science magazine earlier this year looked at the city of Manaus in Brazil, which was hit badly by the disease in the first half of 2020. By June, an immunologi­st, Ester Sabino, at the University of Sao Paulo, estimated more than 60% of the population had been infected.

Predictabl­y enough, transmissi­on rates slowed but in January there was a huge resurgence in cases. Every case that month was caused by a new variant known as P.1. It appears that previous infection did not provide resistance to this new strain.

In March, Nature listed five reasons why herd immunity would be near impossible to achieve. It said it was unclear whether the vaccines even block transmissi­on or simply prevent serious or symptomati­c disease, effectivel­y allowing the disease to continue to spread, albeit with less harmful consequenc­es. It pointed to the fact that ideally you’d also want the vaccine to be rolled out quickly and evenly across the world. Instead, the distributi­on has been messy and uneven. While vaccinated and unvaccinat­ed population­s come into contact, it said, the potential for new outbreaks remains.

New variants are a problem, but we also don’t know how long immunity lasts, potentiall­y putting further pressure on the timeline for getting the bulk of the population vaccinated.

And then there is human behaviour. Already we have seen people reverting to pre-pandemic behaviour despite the fact that we are nowhere near achieving herd immunity. Vaccine hesitancy is another limitation on whether we will be able to stop transmissi­on or merely reduce its toll on the community.

Many experts are now saying that rather than eliminatin­g the virus, we will need to learn to live with it and find ways to minimise its impact.

ECONOMIC CONSEQUENC­ES

Thanks to massive spending by government­s in developed countries, we have fared much better through the Covid crisis than expected.

Australia’s economy grew at record rates over the second half of 2020 and the federal

government estimates real GDP should grow by 1.75% in 2020-21, rising to 4.25% in 2021-22 and 1.5% in 2022-23. The Internatio­nal Monetary Fund (IMF) estimates the global economy will grow by about 6% in 2021 and a further 4.4% in 2022.

However, all of these projection­s are based on a “steady as she goes” recovery from the crisis. In its budget papers, the government said its forecasts were based on the assumption that a population-wide vaccinatio­n program would be in place by the end of the year and while localised outbreaks would occur, they would be effectivel­y contained with no need for further lockdowns or extended state border restrictio­ns.

Migration is also an issue. Thanks to the closing of our internatio­nal borders, the government expects 72,000 more people to leave the country than to move here in 2020-21. The negative trend is likely to continue in 2021-22.

Already that is showing up in a shortage of skilled employees and labour for seasonal work such as fruit picking. But economists warn we are unlikely to return to 3% economic growth without a return to positive migration.

INVESTMENT RISKS

For many investors, the search for yield has been a major concern thanks to the historical­ly low interest rates needed to keep economies moving. While low rates have been a boon for borrowers (and the housing market), they have presented a challenge for savers, particular­ly retirees.

However, we have already seen longterm interest rates heading up, particular­ly in the US, on expectatio­ns of higher inflation as economies recover. The Reserve Bank has indicated it doesn’t intend to start lifting rates for at least three years as it sees both inflation and wages growth remaining low.

The IMF warned in its April Global Financial Stability Report that valuations in many markets were looking stretched thanks to the flow of government money and investors taking more risk in the hunt for returns. Any sudden tightening in interest rates could also lead to a “repricing” of risk that could hit asset valuations.

The Goldilocks scenario is one of a gradual return to normal inflation and interest rate levels as vaccinatio­ns do their job in restoring normal economic activity.

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