Sep 9, 2021

What Rising Delta Cases Mean for the Economy and Markets 

Vaccines, improved testing, and greater information about COVID-19 triggered optimism and set up a strong start to 2021. But, with COVID-19 cases beginning to rise for a fourth time and with worries about the new Delta variant, the future looks more uncertain again. Or does it?

The Delta variant is more severe and about two times more contagious than previous variants. Delta has also caused breakthrough infections in fully vaccinated people, that’s according to the Centers for Disease Control (CDC). With this information, it’s clear that Delta is trickier than earlier forms of COVID-19 and that means there are new fears that we may be facing a slowdown in economic activity.

In the case of Canada, declines in exports and flatter than expected consumer spending in April through to June led to a 0.3% contraction in the Canadian economy. But there are signs that Delta may be having an effect over the third quarter in the world’s two largest economies, too.

In China, a country with a zero-COVID policy, economic growth also hit the brakes in July. This was due to some weather-related issues but was mainly a result of the resurgence of COVID-19 cases attributed to the novel Delta variant. There was a material downside in the macroeconomic data which was evident across almost all sub-categories in both consumption and industrial production. Global equity and commodity markets, for a short period, did not digest such news kindly. That’s because China is expected to remain the most significant contributor to global GDP growth in the short term.

In the U.S., early indications for the third quarter of 2021 suggest that economic growth momentum could be waning as well. Last month’s U.S. jobs report missed even the lowest of consensus forecasts and highlighted that there were no jobs added in the leisure and hospitality sector. This suggests that the spread of the Delta variant might have had an impact in August. Now, with cases mounting higher, more jobs could be affected. Moreover, survey-based data, such as the Institute for Supply Management (ISM) manufacturing index, often seen as a key indicator of the state of the U.S. economy, has also posted small declines in comparison to prior months.

With all that in mind, should we be worried about any broader, longer economic slowdown? According to Jean David Tremblay-Frenette, AIMCo’s Director of Investment Strategy Research, the answer is likely no.

“We should expect sequential growth to rebound this fall on economic reopening and government continued stimulus support. In jurisdictions where there is no zero-COVID policy, such as Canada, the U.S., Europe and some of the major emerging economies, we do not anticipate further total economic lockdowns even if cases continue to rise this fall,” noted Tremblay-Frenette.

He suggests that markets are expected to perform decently in the short term, too.

“Overall, market sentiment and price action in risky markets, such as equities, is currently driven more so by liquidity than economics (although, related to some degree). The markets remain laser-focused on the possible timing of the stimulus being removed. For global central bankers, the negative tone of the macro data emanating from both China and the U.S. combined with the lingering risks of COVID do not provide incentives to begin tapering asset purchases in earnest,” said Tremblay-Frenette.

There is one thing about the future that is certain, uncertainty always exists. Economies and markets have adapted to COVID and will have to continue to adapt. Despite rising COVID cases domestically and abroad for a fourth time, stimulus packages, vaccines and better tracing and testing methods should continue to support a broader economic rebound and favourable market performance.

This article contains forward-looking statements with respect to economic conditions. Such statements address future events and conditions, and therefore involve inherent risks and uncertainties. Although AIMCo believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, AIMCo can give no assurance that such statements will prove to be correct. Accordingly, AIMCo disclaims any and all responsibility for the continued truth of such statements at any future date.

This article is of a general nature only and does not purport to take into account all considerations that may be relevant to any particular individual or organization. As such, this article is not intended to be, nor should it be construed to be, investment advice to any particular individual or organization.