Vaccines Won’t Save Eurozone From Double-Dip Recession

An electronic billboard in Times Square, New York City, on November 9. On that day, stocks surged after Pfizer and partner BioNTech said their vaccine showed in an early analysis to be more than 90% effective in preventing infection from Covid-19.

Positive news on vaccine development is welcome, but investors may be forgetting that the eurozone economy is set for a grim few months as rising Covid-19 infection rates and continued lockdown restrictions push the currency area to the brink of a double-dip recession.

The Dow Jones Industrial Average rose to a record high last Monday after a set of upbeat results from a second potential Covid-19 vaccine, but the time it takes to manufacture, distribute and roll out the vaccine means the positive impact on the economy won’t be evident until at least the spring of 2021.

“Good news on the vaccine likely won’t change the macroeconomic trajectory before mid-2021,” says Gilles Moëc, chief economist at AXA Investment Managers.

Even if efficacy above 90% was confirmed and this could be enough to provide herd immunity, the vaccine may not be quick enough to alter the state of play for this winter, which to a large extent is going to drive the overall growth performance of 2021, Mr. Moëc said. 

“There is absolutely no reason the depth of the ongoing gross domestic product contraction in the fourth quarter should be altered,” the economist said, as vaccination would start in December in the best scenario.

Last Monday, Moderna said its experimental vaccine was 94.5% effective at protecting people from Covid-19 in its first interim efficacy analysis. A week before, Pfizer and partner BioNTech said their vaccine showed in an early analysis to be more than 90% effective, but last week the shot was 95% effective in its pivotal study.

“Markets responded immediately and positively to the news. The economy might take a little longer to follow,” said Rubén Segura-Cayuela, head of Europe economics research at Bank of America.

Sharply rising cases and the tightening of lockdown restrictions across Europe could quickly knock the fragile economic recovery off course well before the vaccine is widely distributed, said Fiona Cincotta, analyst at City Index.

“The fact that there is now light at the end of the covid tunnel has given investors plenty to cheer,” Ms. Cincotta said. “However, it is also impossible to ignore the current backdrop.”

It remains uncertain how long it will take for vaccines to enable economies to return toward normality but it is likely to be many months. Constraints on production, logistical and distribution issues mean mass vaccination programs will take time to set up.

Vaccines will also take around a month to provide recipients with full protection, further pushing back the point when restrictions can be eased.

“Things will get worse before they get better,” said Andrew Kenningham, chief Europe economist at Capital Economics.

Lockdowns across Europe are likely to remain in place for the next two or three months and although the scale of the downturn will vary between countries, Capital Economics forecasts a 3% fall for the eurozone as a whole in the fourth quarter.

But following a challenging winter, the vaccine developments bode well for an economic recovery by the second quarter of 2021 as restrictions are eased.

The specificity of this crisis is that the economy has been stopped to limit the contagion of the virus and this is an exogenous shock that has nothing to do with the economy or financial markets, explained Philippe Waechter, chief economist at Ostrum Asset Managers.

“It’s a period where policy makers have to create a recession to stop the virus without knowing the duration of the crisis,” Mr. Waechter said.

A vaccine will add another means of slowing the spread of the virus, reducing reliance on economically painful measures such as harsh mobility restrictions, said David Kohl, chief economist at Julius Baer.

AXA IM’s Mr. Moëc said the prospect of a vaccine and economic normalization may encourage greater generosity with fiscal stimulus as authorities worry less about rising levels of public debt and take the risk of providing more support in the months ahead.

For southern eurozone countries in particular, vaccines raise hopes of saving the 2021 summer season in the hard-hit tourism sector.

“A widespread rollout of an effective vaccine next year should allow a fairly swift return to normality for Spain’s hard-hit tourism sector and would transform the short-term economic outlook,” said Jessica Hinds, Europe economist at Capital Economics.

Given that Spain relies more than other big eurozone economies on foreign tourism, it stands to benefit more. Capital Economics forecasts the Spanish economy will grow by 4.5% next year, but a vaccine might mean it is closer to double that, Ms. Hinds said.

However, markets may have started the celebrations too soon.

“Investors can ill afford to ignore the inevitable but not entirely predictable time lapse between now and the point in the future when Covid-19 will be effectively behind us,” said George Lagarias, chief economist at tax, audit and advisory firm Mazars.

“In that time period, the stress on the economy might become extreme.”

Write to Maria Martinez at