Josh Rubin
Oct. 30, 2020
As the global COVID-19 pandemic carries on with its deadly toll, most economic and business forecasts assume there will be an effective vaccine against the virus, likely by the middle of next year.
But what if there isn’t?
If those forecasts are wrong, everything from economic growth to stock and bond prices could be affected, economists and market strategists say. Industries which are already struggling could be put into a permanent tailspin. Stock prices, especially in the U.S., would be set for a tumble. Local government tax revenues could also take a hit, as vacancies rise and the value of commercial real estate falls.
A study at the U.K.’s Imperial College of London released this week found that COVID antibodies in people who’ve been infected don’t last very long, suggesting that long-lasting herd immunity — even with a vaccine — might not be achievable.
“It will be a disaster if it’s the worst-case scenario and there’s no vaccine,” said Tony Frost, an economist and associate professor at Western University’s Ivey School of Business.
“The economy will be like a World War Two bomber returning to base. ‘What happened, and my god, look at all these holes,” said Frost.
Among the holes in the economy if there isn’t a vaccine? The airline industry, restaurants, the corporate office space market, and hotels.
The flow of government support that’s been propping up suffering industries will eventually need to be shut down if there’s no vaccine found, said Pedro Antunes, chief economist at the Conference Board of Canada, an economic think tank.
“Markets seem to be assuming that there’s going to be a vaccine. If we don’t have a vaccine, we’re going to have to make some tough decisions,” said Antunes, adding that government debt relative to the size of the economy has grown by roughly 10 per cent in most major economies since the start of the pandemic. “We really can’t afford to keep the floodgates open on these supports.”
The increase in the number of Canadians working from home would also take a toll on the commercial real estate sector, Antunes said. Empty offices would push down commercial rent prices and eventually property values.
“A lot of those office workers won’t be coming back to the offices even if there’s a vaccine. But it would be exacerbated if there isn’t one,” said Antunes. “Every major city in Canada could end up being where Calgary is, with a huge glut in commercial real estate.”
That glut, in turn, would lead to less construction of new buildings, meaning fewer construction jobs, and less tax revenue for municipal governments, Antunes said. The lower property values could also hit municipal budgets, Antunes added, because property taxes are based partly on property values.
Philip Petursson, chief investment strategist at Manulife Investment Management, is less concerned about what might happen if there isn’t a vaccine. Petursson believes governments, businesses and citizens would find a way to keep the economy going.
“At a certain point if there isn’t a vaccine, I could see us taking the Swedish approach,” said Petursson, referring to the Scandinavian country’s approach of keeping most of its economy open through the first wave of the pandemic.
Still, industries which are already struggling, such as restaurants, hotels and airlines, could find themselves permanently smaller if there’s no vaccine, said David Macdonald, senior economist at the Canadian Centre for Policy Alternatives.
“Right now, a lot of the government supports are just freeze-drying industries exactly as they are until there’s a vaccine. If there isn’t, at a certain point, we’d need to ... instead reshape them for a world where COVID is endemic,” said Macdonald. “For the airline industry, that would probably mean fewer flights, and more expensive seats.”
And the pain wouldn’t be shared equally across the economic spectrum. The restaurant and hotel industry, Macdonald pointed out, employ a lot of lower-income workers. Younger workers who enter the job market during a recession have a lower earning potential for the rest of their careers, Macdonald added.
“This has real potential to exacerbate income inequality,” said Macdonald.
In the stock market, share prices across the board could be set for a tumble, said veteran market strategist David Prince.
“The market has priced in solid economic growth around the world by the middle of next year, and I just don’t think that’s going to happen. I think it’s realistically two to three years away, even if there is a vaccine,” said Prince, president of Harbinger Capital Markets.
In Canada, the TSX Composite Index is back up to 15,670 points. While that’s a loss of roughly eight per cent on the year, the TSX had plunged as low as 11,225 in late March during the first wave of the pandemic. In the U.S., the Dow Jones industrial average is down roughly 6.6 per cent on the year, while the S&P 500 has risen 2.5 per cent and the tech-dominated NASDAQ has skyrocketed 24 per cent. All those exchanges also saw strong performances in 2019, with the TSX rising 19 per cent last year.
Any growth that’s come so far during the past two quarters has come because of massive spending on COVID-related aid programs, Prince argued.
“The recovery we’ve had has been because of government spending,” said Prince. In the U.S., which reported Thursday that its economy grew at an annualized rate of 33.1 per cent in the third quarter, the Federal Reserve has been snapping up government bonds during the pandemic, Prince pointed out.
“The Fed held $4 trillion of government bonds in March. It’s up to $7.2 trillion now. And the price of all the support packages and quantitative easing they’re doing is probably going to add another $2 trillion,” said Prince.
Share prices are particularly vulnerable in the U.S., where the outsized influence of tech companies means there are fewer tangible assets supporting stock values.
“With U.S. stocks, just 20 per cent of the market’s value is tangible assets. That’s a downside risk,” said Prince.
Even if there is a vaccine, though, it won’t necessarily be the medical and economic panacea that many people are hoping for.
“It’s not necessarily binary of will there or won’t there be a vaccine. It’s ‘will there be a vaccine? How effective will it be? How long-lasting will it be? How many people will actually take it?” said Western’s Frost.
The likeliest scenario, said infectious disease specialist Dr. Adbu Sharkawy, is that there will be probably be several COVID vaccines available by next summer. But they might not produce the desired effect of protecting the entire population, he suggested.
“Nothing’s guaranteed, obviously. But there’s no evidence that I’ve seen that suggests we won’t have at least one vaccine, but probably three or five by next summer. The bigger issue is will it be able to create a herd immunity,” said Sharkawy, an infectious disease specialist at Toronto’s University Health Network.
Still, even in a worst-case scenario of no vaccine, advances in testing technology mean the economic picture might not be completely doom and gloom, said Sharkawy.
“We don’t have reliable rapid testing yet. But once we get it, that would really make a difference to a lot of businesses, especially ones that by their nature you have large numbers of people together. That would allow us to still keep parts of the economy open, even if COVID becomes endemic,” Sharkawy said.
