News of an effective potential vaccine is a significant boost in the fight against Coronavirus, but it doesn’t yet warrant an upgrade to our baseline forecast.
The complexities of distributing a comprehensive inoculation program, plus the ongoing need for policy support mean that we are unlikely to see the economic benefits much before the second half of 2021. This is in line with our current baseline assumptions.
Instead, we think the latest news raises the probability of our upside scenario and lowers the probability on some of our downside scenarios. This fits with our interpretation that yesterday’s impressive rally in financial markets is less about significantly better baseline growth, and more due to the removal of extreme downside risks.
But downside risks do remain, and policymakers cannot become complacent. The economy today is still in a precarious position, with much of the world now seeing high and rising numbers of Covid cases. The recovery will require ongoing support and resistance to the urge to tighten prematurely.