Will the Delta variant derail Asia’s economic recovery?

Although the variant is rapidly transmissible, higher vaccination rates should help mitigate economic consequences by weakening the link between new cases and bad health outcomes, easing pressure on policymakers to prolong restrictions

Sylvia Sheng

Published: 4:30pm, 30 Jul 2021

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Worries about the spread of the highly transmissible Delta variant of Covid-19 has unnerved markets recently, given its potential to disrupt the global economic recovery. Jitters have focused on Asia, where the variant has sparked a resurgence of virus cases in many parts of the region.

Indonesia, Malaysia, South Korea and Thailand are all fighting record-high new case counts, while infections are rising in Japan and Singapore in recent weeks. China also saw a few local outbreaks linked to the Delta variant, although the total case counts remain low. To try to control the virus, social distancing measures were tightened across much of Asia with another “state of emergency” declared for Tokyo, and more stringent restrictions in South Korea, Indonesia, Singapore and Thailand.

This has reignited the debate about whether lockdowns to protect public health will hurt economies as they curb reopening activity, making Asia’s nascent economic recovery look vulnerable.

The link between Covid-19 cases and economic activity depends largely on policymakers’ willingness to impose restrictions. This is in turn closely related to the link between Covid-19 cases and hospitalisation and fatality rates.

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The recent tighter social distancing measures are clearly a headwind for domestic economic activities, especially for services consumption, but this is likely to be only a temporary setback in Asia’s domestic demand recovery as vaccinations pick up pace in the region.

Even though the Delta variant is proving to be rapidly transmissible, higher vaccination rates should help mitigate economic consequences from the new Covid-19 wave by weakening the link between new cases and bad health outcomes, easing pressure on policymakers to prolong restrictions. Evidence from other Delta-affected developed market economies so far is encouraging, pointing to relatively effective protection of vaccines against more severe health outcomes from Covid-19.

Case counts have soared in the UK, but we have not seen a sharp rise in mortality, probably because more than 55 per cent of its population is fully vaccinated – and most recently there have been signs of cases dropping back, much earlier than expected.

In the US, many hospital systems are reporting that severe Covid-19 outcomes are almost exclusively occurring among the unvaccinated population.

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However, the path out of the near-term weakness in domestic growth won’t be uniform across Asia – given the wide divergence in vaccination progress. China and Singapore are leading the pack and should make significant progress towards herd immunity, having vaccinated more than 50 per cent of their populations.

At the same time, daily vaccinations have accelerated rapidly in Japan, Malaysia and Taiwan, and they are on track to reach critical vaccination thresholds by the end of the year, enabling further economic reopening.

In Japan, a key milestone for the total vaccination rate is one-third of the population, which covers all the medical workers and over 65-year-olds. At the current pace, this target should be reached in the next few weeks.

Given Japan’s fast-ageing population, reducing the number of infections among the elderly population who face higher hospitalisation risks is critical for the country to avoid further restrictions.

People walk along the Asakusa area in Tokyo on June 30. While Japan is seeing an increase in Covid-19 cases, its vaccination rate is also rising. Photo: AP

Meanwhile, more significant economic reopening for the Association of Southeast Asian Nations economies is unlikely to happen until next year, due to the currently low vaccination rates. Slow vaccine procurement has been a key issue for many Asean economies.

However, we could see some improvement in vaccine supply in the second half of this year as vaccine demand in developed market countries starts to peak and domestic vaccine production picks up in a number of emerging market economies.

On the brighter side, while the recent tighter restrictions pose challenges to the near-term domestic demand recovery in many Asian economies, the external demand environment is likely to remain supportive, fuelled by the more resilient developed market economies.

Garment workers come out of a factory during the lunch break as factories remain open despite a countrywide lockdown, in Dhaka, Bangladesh, on July 6. Photo: Reuters

Meanwhile, solid June activity data suggests that fears of a sharp growth deceleration in China are probably overdone. The dovish tilt in China’s monetary policy stance following the recent reserve requirement ratio cut should help to protect China’s steady growth rate.

As a result, Asian economies will continue to benefit from robust export performance amid firm external demand. In particular, trade-oriented North Asian economies are likely to benefit more from a strong global trade cycle.

The recent resurgence in virus cases looks set to delay rather than derail Asia’s economic recovery. While the impact of the Delta wave is likely to be modest for Asia as a whole, slow vaccination rate in parts of Asean makes those economies relatively more vulnerable. However, a more drawn-out domestic demand recovery suggests both monetary and fiscal policy support may have to stay accommodative for longer.

Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management