Wall Street is obsessed with COVID these days and rightly so.
The Purchasing Managers Index (PMI), based on surveys of supply-chain managers, is generally regarded by the financial market as the best overall leading indicator of economic cycles. The data for August released this week paint a picture of diverging momentum among some of the largest economies in the world, especially in the most important sector of these economies – the service sector:
- While the US service PMI fell again (to 55.2), its third consecutive month of decline, the Chinese service PMI jumped by more than four points to 54.9.
- While the UK service PMI fell to a 6-month low, German service PMI came in near its multi-year high reached last month.
What is driving this economic divergence?
The answer should be obvious to anyone following cross-country COVID-19 trends:
- In the US, the number of new daily COVID-19 cases has been surging since the start of July to reach 150,000 a day this week. The number of new cases in China also went up in July, but by much less and, over the past two weeks, it has dropped below 30 a day.
- In the UK, the number of new cases, after falling back sharply in late July/early August, is creeping up again. In Germany, the number of new cases has been rising too, but very slowly, with the absolute level currently only a quarter of that of the UK.
If diverging COVID-19 trends in these countries are driving their diverging economic momentums, the question must necessarily be asked: what is the driver behind this divergence of pandemic trends?
In Chart 1, I have ranked the 30 OECD countries that are currently experiencing the highest volume of new cases relative to their population by their average daily new COVID cases per million people. The UK, and the US, each with nearly 500 cases per million, are close to the top of the field, just behind Israel, with over 800 cases per million.
What is it about Israel, the UK and the US, that they are struggling more than other countries to control the outbreak of the Delta variant?
Is it their vaccination penetration? Chart 2 shows that the UK and Israel are in the top third of the same 30 OECD countries in terms of the share of their population that have received full vaccination. Even the US (with only 50% of its population fully vaccinated) is in the second third of these OECD countries.
Is it their social distancing requirements? Chart 3 shows that the US and Israel are both in the top third among the 30 OECD countries in terms of the stringency of their policy response, at least according to the Blavatnik School of Government at Oxford University. Even the UK is in the second third.
What the above suggests is that if we are to explain why Delta is wreaking more havoc in Israel, the UK and the US than elsewhere, we have to dig deeper. Adding to the mystery is the fact that the correlation between new COVID cases per million and the share of the fully vaccinated population for our 30 OECD countries is a positive number (14%). Go figure!
As different as Israel, the US, and the UK are from each other, they do have one distinction in common. They were among the first countries to procure and administer COVID vaccines. Indeed, by May 24, exactly three months ago, Israel had already fully vaccinated 57% of its population, the UK 34% and the US 39%. By comparison, by that date Canada had only fully vaccinated 4% of its population and Sweden 11%.
Is it possible that the fact Israel, the UK, and the US were the first to come out of the gate means they are now the first to see the effectiveness of the vaccines wearing off?
To test this hypothesis, I calculated the correlation between the average new daily cases per million and the share of population that became fully vaccinated OVER THE PAST THREE MONTHS for our 30 OECD countries. Out came a comfortingly negative number of -48%. In non-technical terms, this means that at least these countries, those that completed vaccination of a higher share of their population over the past three months have right now on average lower number of new cases per million people.
So, we have found one reason why Israel, the UK and the US have had such trouble containing the spread of the Delta. By the simple fact that they did the heavy lifting much earlier on, they only fully vaccinated an additional 3% (Israel), 29% (UK) and 13% (US) of their population since May 24.
To check the robustness of the observation, I then ran a simple linear regression of the number of new cases per million people on (1) the share of the population that became fully vaccinated over the past 3 months and (2) the stringency of the policy response lagged by 2 months.
What I find is that for every 10% increase in the share of population receiving full vaccination over the past three months, the number of new daily cases per million people drops by 40. I find that policy response matters too but its estimated coefficient is less statistically significant than that of vaccination (although that could be due to the difficulty of measuring and comparing policy responses). The model has an explanatory power of 30%, although if we are to drop countries like Mexico and Colombia it improves significantly.
These results lend support to the growing concerns that the effectiveness of vaccines may be waning faster than previously thought.
They also make clear that the race for a third booster shot is now on. Here, Israel, the UK, and the US are moving at very different speeds.
- Israel, the first mover in the third booster shot, has completed administering more than 1.5 million shots over the past two weeks and is now continuing with people under 40.
- The UK government announced two weeks ago that they plan to administer 32 million third booster shots in September.
- The US is way behind the other two countries, with the Biden administration announcing that the third booster shot will start only on September 20.
With only 13% of the US population having received their full vaccination in the past three months, the fact that Americans must wait almost another month before they can get a third booster shot is worrying, especially given the re-opening of the schools next week and the arrival soon of cooler weather that will drive people indoors.
The Biden administration has made mandating masks and vaccination as their policy priority. The analysis in this article suggests that the greatest challenge facing the US may not be those Americans who have chosen not to be vaccinated, but those who, though having been vaccinated, are facing a waning of protection from the virus.
