Growth has peaked as Delta concerns rise

There are increasing indications from around the world that economic growth has already peaked, especially as the spread of the Delta variant of Covid-19 has led many countries to reintroduce restrictions on activity. Data points are coming in under expectations and positive sentiment is starting to wane. This is not to discount what will still be an especially strong growth rate in 2021, but it is becoming clear that the last mile will be the hardest won, and the outlook for the next several quarters is more uncertain.

Daily new Covid-19 cases have reversed the earlier declining trend that had been in play since May. The seven-day moving average has risen to 624,000 on August 14, a rise of some 300,000 from June troughs amid sharp rises in countries from the US to Iran. Even countries with high levels of vaccinations, such as Israel, are seeing spikes in cases, leading to talk of a new lockdown. Meanwhile, countries across Asia, whether highly vaccinated or not, have also reimposed or strengthened restrictions. Both China and Japan, the world’s largest and third-largest sovereign economies, have tightened measures in the face of Delta’s spread, while key Australian states have also locked down once more. In the US, vaccine hesitancy has seen the percentage of adults who have had two doses remain stubbornly under 60%, with many states lagging around the 45% mark, and cases are picking up there once more, rising to levels last seen at the start of the year.

Covid-19 cases rising again: New daily cases ('000 7dma)

Source: Bloomberg, Emirates NBD Research

Such an atmosphere is likely to weigh on the very robust demand recovery we have seen until now in economies across the world. Loosening restrictions have gone hand in hand with boosts to the key affected sectors, as evidenced by the UK’s Q2 GDP growth figures released last week. The economy expanded 4.8% q/q, bolstered by the retail and hospitality sectors as restrictions were lifted. Base effects will in any case mute the ongoing quarterly gains in economies around the world, but the Delta threat, and fears over other new variants, risks much slower growth in demand levels in the months ahead. This could be driven either by new government guidelines, or else greater wariness about going out and catching the virus by populations.

There have been a number of indicators that this is already happening. Chinese retail sales expanded by just 8.5% y/y in July. This would be a robust expansion in normal circumstances, but it was a marked slowdown from the 12.1% the previous month, and far short of consensus projections of 10.9% growth. Annualised Q2 growth in the US undershot expectations by some two percentage points and there have been more disappointing indicators there since. Consumer confidence in the US moved sharply lower in August according to the University of Michigan consumer sentiment index, which fell to its lowest reading since 2011. The Citi Surprises Index for the US turned negative in July for the first time since last May, indicating that most data releases have been weaker than anticipated.

Citi Surprises Index, US, has turned negative again

Source: Bloomberg, Emirates NBD Research

The high levels of demand seen since the pandemic eased, which has been evident in sectors from housing to hospitality, has arguably driven the recovery to now, while production has been held back by chip shortages and other disruptions associated with the pandemic and its fallout. Countries with significant automotive sectors in particular have seen growth held back by these issues. While easing demand might give some industries space to iron out some of the blockages in supply chains and manufacturing, it would however weigh on the headline outlook. The renewed spread of the Coronavirus would also exacerbate these existing issues, as seen at the Chinese port of Ningbo-Zhoushan, which saw a terminal closed owing to an outbreak of Covid-19 in August. The Shanghai Containerised Freight Index currently stands at 4,282, compared to a series average of 1,114. Inflation looks like it may have peaked already, but it remains high by recent standards and this will further impede demand.

Brent futures, USD/b, under pressure since start of August

Source: Bloomberg, Emirates NBD Research

This global trend of potentially weaker demand is relevant for countries all over the world, not least within the MENA region. Oil prices have fallen back since the start of the month (see Oil slumps to start August) as fears over Delta have grown, and the EIA last week cautioned that global oil demand had ‘abruptly changed course’ as it adjusted its demand projections downward. Equally, the robust growth seen to now in world trade appears to have stalled in recent months as the CPB Merchandise World Trade Volume Index has come off its March peak, although the annual growth rate remains high, with potential implications for the regional trade and logistics sector if growth slows further. We hold to our view that 2021 will continue to post healthy growth, both regionally and globally, but the risks to this outlook are mounting.