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Aug 13, 2021

Will delta sink the economy?

Hotels, restaurants and attractions are reminiscent of life at the height of the 2006 Alberta oil boom, and this surge in growth is likely to continue through to the end of 2022. What’s “normal” for now?

Scott serves as Chief Investment Officer, and has in excess of 25 year of experience in investment management and equities research.
  • Back to normal is booming
  • The real risks with the delta variant
  • What keeps us up at night - and what doesn't


My daughter and I recently went on a road trip through western Canada, making stops in British Columbia, Alberta and Saskatchewan. Despite some intense wildfire smoke that we saw – and expected – in certain areas, it was great to be on the open road again. What I didn’t expect to see was a world that somewhat reminded me of Alberta at the height of the oil boom around 2006.


Back to normal is booming

While on the road, there were a few incidents that oddly mirrored the boom. We went for a late lunch in Kamloops at 2:30 PM. The restaurant was packed and the waiter remarked that each of the past three weeks had broken all previous records for sales. And whether it was Edmonton or Swift Current, hotels were at, or near, capacity.


But my biggest oil boom flashback came in Drumheller at a chain restaurant. We saw a sign indicating that wait times were unusually long as the restaurant was understaffed. They’d been trying for more than a month to hire without any luck, so the restaurant was running at half empty as a result.


Of course, the nature of this increased activity isn’t a commodity boom this time. It’s been driven by an easing of COVID-19 restrictions. We often refer to this as a return to normal. However, the activity we’re seeing now is anything but normal, and it will likely stay that way for some time. We continue to believe that we’ll see above-normal growth, though not as elevated as we’re seeing this summer, right through to the end of 2022.


The real risks with the delta variant

The biggest risk to our outlook remains COVID-19 and, in particular, the delta variant. As most know by now, this variant is up to 60% more transmissible. Delta is already causing some major employers such as Apple, Google and Uber to delay their back-to-work plans. It’s a reminder of how quickly things can change with COVID-19 and how serious the situation still is from a health perspective.


From an economic perspective, we don’t think the delta variant will stall the recovery. It’s easy to forget that perhaps the biggest reason to lockdown the global economy in the first place was to avoid overwhelming our medical systems, which would undoubtedly have led to many more deaths than we experienced.


Most developed countries now have over 50% vaccination rates for at least one shot. That provides a lot of protection against getting the virus and/or needing hospitalization.


Let’s take a deeper look at the UK to gauge Canada’s possible future. There, the delta variant now accounts for virtually all cases in the country (it’s 75% in Canada). Close to 60% of the population is fully vaccinated, with another 10% or so having one shot (the numbers are similar in Canada). As can be seen in the chart below, the country just went through another wave that saw cases rise to 80% of its peak case count last winter.


Despite this significant wave, hospital admissions only rose to 20% of previous peaks and deaths were fewer than 10%. Clearly, the vaccine is working and despite the more transmissible nature of the delta variant, we should be able to avoid the worst outcomes and continue our recovery.


Figure 1: UK normalized to winter peak

Chart showing the UK's COVID-19 numbers by cases, hospital admissions and deaths from August 2020 to July 2021

Source: NHS, Bernstein analysis, U.S. Biopharmaceuticals team


What keeps us up at night – and what doesn’t

What’s most worrisome about new variants is the potential for them to be resistant to our existing vaccines. This would likely see hospital admissions spike and lead to more lockdown measures. Obviously, the economic consequences would be negative.


We’re particularly concerned about developing markets. Although countries like Brazil are improving in vaccination rates (50% with at least one shot), other nations like India (less than 30%) and Russia (around 25%) are far behind. They need help and it’s in our own best interest to provide it to minimize the chances of more deadly variants. The fact is, COVID-19 is here to stay and we need to learn to live with it like we do other viruses. The best way to do that in a global economy is to minimize the chances of more dangerous variants cropping up.


The impact of the delta variant should not be minimized. It’s very serious and will lead to more cases. We do think, however, that from an economic standpoint the variant is manageable. Although it will cause volatility in the economy and the markets, it’s not likely to stop our recovery.


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