What could go wrong?
That’s the question Goldman asked in a sweeping new note that found Joseph Briggs and David Choi attempting to quantify the hit to the bank’s upbeat outlook for the US and global economies in 2021 from various downside risks.
As market participants learned in 2020, the list of things that could go awry is everywhere and always longer than you think, precisely because we can’t know what we don’t know. That most annoying of all tautologies was on display around this time one year ago, when it became clear that an apparent bat-borne illness spreading rapidly in China might represent a serious threat to global health.
On Monday, Joe Biden was poised to institute a new travel ban aimed at, among other things, containing a worrisome South African variant of COVID-19 that’s 50% more infectious (on some estimates) and that some fear could evade the vaccines. In addition, Biden’s ban was set to apply to non-US citizens who’ve recently been to Brazil, the UK, Ireland, and Europe.
That underlines what many believe to be the biggest risk of all — a COVID variant that doesn’t respond to the vaccines.
Goldman called that “the most severe downside risk,” as it would potentially mean “progress toward herd immunity from current vaccination efforts would be lost or severely set back.”
The bank recapped what we know so far, which is just that “preliminary evidence suggests current vaccines generate an antibody response to the UK strain and will remain effective [while] results for the South African strain are both more preliminary and more mixed, with two early studies suggesting some decline in vaccine efficacy.”
Irrespective of what happens with the South African strain, Goldman cautioned investors that “nearly all experts anticipate that vaccine-resistant strains could evolve, although generally do not believe such an evolution is imminent.”
Obviously, the emergence of a vaccine-resistant strain this year would impair the recovery and, at the risk of overstating the case, could be a death knell of sorts for already hard-hit sectors which limped into the new year after bankruptcies surged amid the rolling lockdowns that characterized 2020.
Goldman enumerated a trio of “silver linings.” “The FDA’s COVID-19 vaccine development guidance notes that adjustments to COVID-19 vaccines could be approved under the FDA’s accelerated approval program [and] although mutations will weaken protection from prior vaccinations and infections, partial immunity from past vaccines should still contribute to reaching herd immunity from the new strain,” the bank said, adding that “investments and lessons from the initial vaccination push would likely make revaccination efforts more efficient.”
What about the specifics of a timeline? How long would it actually take if a new vaccine needed to be developed and approved?
Well, Goldman attempted to answer that using “recent comments from companies, experts, and regulators.” The bank concluded that it would take around 10 months from the time a vaccine-resistant virus strain began spreading to reach herd immunity.
In the right-pane (above) you can see the estimated hit to the bank’s growth forecast.
For this (hopefully) hypothetical exercise, they assumed a vaccine-resistant virus strain showed up in March, prompting spending in the services sector to fall back to levels seen this month and remaining flat all the way through September when spending would resume “at a mild pace.”
But, it would still be another five months until herd immunity was achieved.
Ultimately, Goldman said that this scenario would mean that “the consumption boom that drives our current 2021 growth forecast would be delayed until 2022, resulting in a downgrade of our 2021 growth forecast to +4.0% on a full year basis versus +6.6% in our baseline forecast and +3.1% on a Q4/Q4 basis versus +7.5%.”
It’s hard to fathom what kind of fiscal stimulus response this would require, but let’s just say politicians would be forced to ponder trillions more in spending to stave off another existential crisis for leisure, hospitality, travel, and services jobs.
As far as some kind of nightmare scenario where COVID just keeps mutating to evade vaccines year in and year out, Goldman, like the rest of humanity, doesn’t even want to think about that right now.
“Most viruses (with the seasonal flu as a notable exception) do not mutate in a manner that regularly renders vaccines ineffective, and so we do not incorporate such a mutation in our baseline forecast,” Briggs and Choi remarked.
Remember, the key to getting the new vaccines was Chinese scientists mapping the genomes of the covid virus quickly. We may be reliant on the same guys (gals) doing the same on the mutants.
The mRNA technology that has proven itself so impressively in the PFE/BNTX and MRNA vaccines can be very rapidly adjusted to target a new variant that is different enough to require it. As long as the new variant remains a coronavirus – which it by definition will – the revised vaccine can be designed, built and ready to test in several weeks.
The primary obstacle will be regulatory, rather than scientific. If the FDA requires the full process of pre-clinical, phase 1, phase 2, and a n=30K phase 3, then it will take several months to have a new vaccine ready for mass production. If the FDA treats this like the seasonal influenza vaccine, which is routinely revised each year to target the expected combinations of influenza virus, then the new vaccine can be ready for mass production in weeks.
The next obstacle will be logistical. If we build a massive nationwide vaccination program, complete and dismantle it, then have to stand it up again, that will be more months and months lost. If we build and sustain a continual vaccination process with every American receiving a booster every 6 months, then the new vaccine can be combined with the old and fed into the supply chain. This will require an expensive ongoing program, but as we’ve seen, penny wise is pound foolish here.
Anyway, if vaccine variants are indeed our “most severe risk”, that makes me bullish indeed.