Goldman Sachs Research
Global Economics Analyst
Global Reopening: Slower, but Not Slow (Struyven/Bhushan)
29 July 2021 | 9:41PM EDT | Research | Economics| By Jan Hatzius and others
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  • The three pillars underlying our view that vaccinations will further drive a strong global recovery remain intact. First, we expect the world to produce 13bn vaccine doses this year, all providing solid protection against severe disease. Second, rising immunity leads to substantial easing in our GS Effective Lockdown Index (ELI)—a combination of official restrictions and actual mobility data. Third, ELI easing continues to predict GDP growth well.

  • However, we expect the remaining part of the service sector recovery to be less rapid than the early stages. Delta outbreaks are weighing on growth, and we see a fairly high probability that either winter seasonality, some reduction in natural or vaccine-induced immunity, or a somewhat more transmissible/evasive future strain lead to another temporary episode of moderate ELI tightening. Moreover, the concentration of the remaining weakness in services spending among individuals, sectors, and countries with a higher exposure or aversion to virus risk suggests that the remainder of the recovery will be more gradual.

  • We next estimate reopening growth impulses under baseline and downside ELI scenarios. In the base case, the ELI eases further, except for a year-end tightening episode. Our baseline reopening impulse to global growth slows from 5pp annualized in Q2-Q3 to 3pp in Q4, and 1pp in 2022H1. We estimate the largest impulses in Q3 in India, Canada, and the Euro Area, but smaller gains in the US and China. In a downside scenario, substantial ELI tightening around year-end, for instance due to some vaccine escape or waning immunity, reduces the global reopening impulse to -2pp in Q1.

  • Since the emergence of the Delta strain in early April, the gap between our 2021 global growth forecast and the median consensus forecast has narrowed from 1pp to 0.3pp, reflecting consensus upgrades and GS downgrades. We have made larger 2021 growth downgrades in low-vaccination Asian economies, including India and South East Asia, but also the US. Our growth forecasts now differ from consensus expectations by above-consensus 2021 views in economies with lots of room for reopening, such as India and Spain, and the sharpness of the US deceleration over the next year and a half on the back of a declining reopening impulse and a negative fiscal impulse.

Global Reopening: Slower, but Not Slow (Struyven/Bhushan)[1]

Markets have become concerned about reopening and growth as global infections have risen over the past month. In this Analyst, we first revisit our longstanding view that vaccinations will further drive a strong global recovery. We then discuss why we expect the remaining part of the global service sector recovery to be less rapid than the early stages, and conclude by estimating reopening growth impulses.

Still Constructive on Vaccine-Driven Recovery

Our constructive view of a vaccine-driven recovery has relied on (1) the mass production of vaccines that strongly protect against hospitalizations, (2) the resulting easing in restrictions, and (3) the growth boost from easing. These three pillars remain mostly intact, although news on the Delta strain and vaccine efficacy is mixed.
Pillar 1: Mass Production of Vaccines Strongly Protecting Against Severe Disease
The world remains on track to produce 13bn of vaccine doses this year, all providing strong protection against severe disease. Exhibit 1 shows that the efficacy of vaccines to prevent hospitalizations from the Delta strain remains elevated at around 90%. The Delta variant, however, is weighing on vaccines’ ability to prevent (asymptomatic) infections. Pfizer and BioNTech also noted that “vaccine efficacy in preventing both infection and symptomatic disease has declined six months post-vaccination, although efficacy in preventing serious illnesses remains high”.[2]

Exhibit 1: Vaccines Still Protect Against Hospitalization Risk

1. Vaccines Still Protect Against Hospitalization Risk. Data available on request.
Source: Goldman Sachs Global Investment Research
Pillar 2: Higher Vaccination and Immunity Rates Lead to ELI Easing
Given solid vaccine protection against hospitalizations, ongoing rises in vaccination and immunity rates should drive easing of restrictions and growing consumer comfort. Our GS Effective Lockdown Index (ELI)—a combination of official restrictions and actual mobility data—has eased by 20 points this year in the group of high vaccination economies, while it has eased only slightly for low vaccination economies.[3] Using regressions, we find that higher estimates of our total immunity proxy (from vaccinations or infections) lead to easier ELI levels, and that the marginal effect is the highest in the 40-70% immunity range (Exhibit 2). Therefore, the further rise in global immunity we expect should drive further ELI easing.

Exhibit 2: Higher Immunity Leads to ELI Easing

2. Higher Immunity Leads to ELI Easing. Data available on request.
Source: Goldman Sachs Global Investment Research
Pillar 3: ELI Moves Predict Growth Well
Further ELI easing should support GDP growth because ELI moves continue to predict GDP growth well. Exhibit 3 shows the tight relationship for the largest economies in 2021Q2 between ELI changes and our quarterly GDP growth estimates. The coefficient of -0.18 implies a boost to non-annualized GDP growth of 1.8pp per 10-point decline in the ELI. Exhibit 4 shows that the sensitivity of activity to the ELI has diminished over time, consistent with our work on adaptation, and that growth appears more sensitive to ELI easing than to tightening.

Exhibit 3: A Close Relationship Between Changes in the ELI and our Q2 Growth Estimates

3. A Close Relationship Between Changes in the ELI and our Q2 Growth Estimates. Data available on request.
Source: Goldman Sachs Global Investment Research

Exhibit 4: The Sensitivity of Growth to the ELI Has Diminished over Time

4. The Sensitivity of Growth to the ELI Has Diminished over Time. Data available on request.
We exclude Russia due to oil price fluctuations and 2020Q4.
Source: Goldman Sachs Global Investment Research

A Less Rapid Next Leg of the Recovery

Although we remain constructive on the vaccine-driven global service sector recovery, we expect the next leg to be less rapid than the early stages, for both medical and economic reasons.
On the medical side, the more transmissible and somewhat more evasive Delta strain implies a slower recovery because of renewed outbreaks.[4] Renewed outbreaks have already imposed fairly large drags on growth in several low vaccination economies, including India, Malaysia, South Africa, and Australia. The Delta strain should, however, only weigh modestly on growth in countries with high vaccination rates and containment strategies through consumer risk aversion, labor supply softness, and travel restrictions. We expect that the vaccine-driven ELI improvements over the next year will not be a straight line. We see a fairly high probability that either winter seasonality, some waning in immunity, or a somewhat more transmissible/evasive future strain lead to another episode of modest ELI tightening.
On the economic side, the concentration of the remaining weakness in services spending among individuals, sectors, and countries with a higher exposure or aversion to virus risk suggests that the remainder of the recovery will be more gradual.
While most individuals in highly vaccinated economies appear comfortable returning to high-contact services, some are still reluctant. The share of Americans reporting to “always avoid” high-contact activities has decreased but remains substantial at around 50% for public transportation and large events, and 30% for travel (Exhibit 5, left panel). Although vaccinations have a statistically significant negative impact on individuals’ aversion to high-contact activities, demographic factors and perceptions about Covid appear to have a larger impact (right panel). A further recovery will require not only rising vaccinations and related medical improvements, but also time for individuals to become more comfortable. Incorporating more persistent consumer caution, and a slow recovery of the office-adjacent economy, our US economists have lowered the H2 consumption growth forecast by 2pp.

Exhibit 5: Many Americans Still Avoid High-Contact Activities

5. Many Americans Still Avoid High-Contact Activities. Data available on request.
Regression combines the last four samples (late May-early July), and uses ages 18-29, disagreeing with government, and low perceived Covid danger as reference groups.
Source: YouGov, Goldman Sachs Global Investment Research
Looking across countries, differences in immunity rates, risk attitudes, and economic structures also imply an uneven and more gradual next phase of the recovery. Exhibit 6 shows the sensitivity of the ELI to excess fatalities as a measure of Covid risk aversion. We identify countries with high risk aversion (e.g. China, Australia, and Japan), moderate risk aversion (e.g. Canada, the EU, the UK, and India), and low risk aversion (e.g. Brazil, Sweden, the US, and Russia). China’s high risk aversion could keep quarantines and travel controls in place for longer, and delay the recovery in tourism economies such as Vietnam, Thailand, and Singapore.

Exhibit 6: Higher Risk Aversion to Covid in Asia-Pacific

6. Higher Risk Aversion to Covid in Asia-Pacific. Data available on request.
We regress the 7-day moving average (7DMA) ELI on contemporaneous 7DMA estimated excess fatalities.
Source: Goldman Sachs Global Investment Research

A Diminishing Reopening Boost

We next estimate reopening impulses to growth in a baseline and a downside scenario. We first construct baseline ELI paths, shown in Exhibit 7, in three steps:

  1. End point. We assume that the steady state ELI level and the time to get there depend on a country’s immunity and Covid risk aversion (Exhibit 6). To illustrate, we assume the US will reach an ELI of 2.5 in September this year, but that Australia will only come down to 5 in 2022Q2.

  2. Shape. We model the ELI trajectory between its current level and the end point using our immunity timelines and the immunity-ELI relationship from Exhibit 2.[5]

  3. Year-end wave. We incorporate another episode of modest-to-moderate ELI tightening through the turn of the year, where the peak ELI depends on historical ELI tightening, a country’s immunity, and its risk aversion.

Exhibit 7: We Assume Substantial Further ELI Easing

7. We Assume Substantial Further ELI Easing. Data available on request.
Source: Goldman Sachs Global Investment Research
Exhibit 8 shows our baseline reopening impulses to quarterly annualized growth. The global reopening impulse slows from 5pp in Q2-Q3 to 3pp in Q4, and just above 1pp in 2022H1. Our H2 reopening impulse is larger in the Euro Area than in the US, where much of the expected progress is behind us.

Exhibit 8: The Reopening Impulse to Global Growth Slows From 5pp in Q2-Q3 to 1pp in 2022H1

8. The Reopening Impulse to Global Growth Slows From 5pp in Q2-Q3 to 1pp in 2022H1. Data available on request.
Source: Goldman Sachs Global Investment Research
We also estimate large Q3 reopening impulses in India, Canada, and the UK, where our ELIs have recently eased sharply (Exhibit 9). In contrast, we estimate reopening impulses that are negative in Q3 for Australia, South Africa, and Indonesia, but turn positive in Q4. Our impulses are small in China from Q3 onwards given the fairly complete recovery in the ELI and domestic activity.

Exhibit 9: We Estimate Large Positive Reopening Impulses in Q3 in India and Canada

9. We Estimate Large Positive Reopening Impulses in Q3 in India and Canada. Data available on request.
Source: Goldman Sachs Global Investment Research

Downside Risks to Reopening

We next analyze a downside scenario where the ELI tightens more substantially around year-end, for instance due to waning immunity or some vaccine escape, and then eases only gradually early next year (see Exhibit 10 and Appendix 1). Relative to our baseline, this downside scenario reduces the global reopening impulse by 1pp to 2½pp in Q4 and by 4pp to –2½pp in Q1, but boosts the impulse by 5pp to 6pp in Q2 (Exhibit 11).

Exhibit 10: Illustrative Downside Scenarios for the ELI

10. Illustrative Downside Scenarios for the ELI. Data available on request.
Source: Goldman Sachs Global Investment Research

Exhibit 11: In a Downside Scenario, the Global Reopening Impulse Turns Negative in Q1

11. In a Downside Scenario, the Global Reopening Impulse Turns Negative in Q1. Data available on request.
Source: Goldman Sachs Global Investment Research

Still Constructive but More Selectively Bullish

The global reopening outlook has turned less bright since the emergence of the Delta strain and India’s terrible second wave. Since April 1st, the gap between our 2021 global growth forecast and the median consensus forecast has narrowed from 1pp to 0.3pp. As the left panel of Exhibit 12 shows, this reflects consensus upgrades but more recently also downgrades to our own estimate now at 6.4%.
Among the 25 largest economies we cover and since April 1st, we have made relatively large downgrades to 2021 growth in the low-vaccination Southern Asian economies of India, Indonesia, and Malaysia (all -1½pp), and bigger downgrades to Thailand (-2pp) and the Philippines (-3½pp), which face the additional drag of weak international tourism (right panel). We have also downgraded our US growth forecast by around ½pp over this period, reflecting a more cautious consumption outlook and bottlenecks in the goods and housing sectors. On the positive side, we have lifted our Brazil and Mexico 2021 forecasts by 1½pp because, in contrast with Asia-Pacific, we estimate that they have now reached relatively high immunity levels and that activity has become increasingly insensitive to Covid.

Exhibit 12: The Gap Between Our 2021 Global Growth Forecast and the Consensus View Has Narrowed; Still Above Consensus in Economies with Lots of Room for Reopening, Such as India and Spain

12. The Gap Between Our 2021 Global Growth Forecast and the Consensus View Has Narrowed; Still Above Consensus in Economies with Lots of Room for Reopening, Such as India and Spain. Data available on request.
Source: Bloomberg, Goldman Sachs Global Investment Research
Our growth forecasts now mainly differ from consensus expectations by above-consensus 2021 views in economies with lots of room for reopening, such as India (+1½pp above consensus) and Spain (+1pp), and the sharpness of the US deceleration that we expect over the next year and a half on the back of a declining reopening impulse and a negative fiscal impulse.

Daan Struyven

Sid Bhushan

Appendix

Baseline ELI Paths

Baseline ELI Paths. Data available on request.
Source: Goldman Sachs Global Investment Research

Downside ELI Paths

Downside ELI Paths. Data available on request.
Source: Goldman Sachs Global Investment Research

Exhibit 13: Downside GDP Growth Reopening Impulses

13. Downside GDP Growth Reopening Impulses. Data available on request.
Source: Goldman Sachs Global Investment Research
  1. 1 ^ We thank Dan Milo and Rina Jio for their contributions to this report.
  2. 2 ^ These Israeli and trial data make booster shots this year likely, slowing down distribution in low income economies.
  3. 3 ^ We focus on the large economies distinguishing between economies with a current first shot vaccination population rate above 40% (US, Euro Area, China, UK, Canada, and Brazil) and below 40% (India, Japan, Russia, Australia, South Africa, Indonesia, South Korea).
  4. 4 ^ Full theoretical herd immunity is unlikely to be reached based on the very high basic reproduction rate, vaccine hesitancy, and protection levels against infections from vaccines or prior infections that are not very elevated and diminish over time.
  5. 5 ^ We also incorporate adjustments for countries where cases are currently rising (e.g. a flat ELI for the next 45 days in the US in Exhibit 7) and based on inputs from our country economists (e.g. a flat ELI for the next 60 days in India).

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

+1 212 902-0394
jan.hatzius@gs.com
Goldman Sachs & Co. LLC
+1 212 357-4172
daan.struyven@gs.com
Goldman Sachs & Co. LLC
Sid Bhushan
Daniel Milo