Episode 40: Will COVID-19 pills be a game changer for the economy?
24 Nov 2021
Merck and Pfizer have recently introduced oral anti-viral treatments for those infected with COVID-19. Clinical trials indicate a high rate of efficacy for both in terms of preventing severe disease, hospitalization and death. Could these pills become a game changer in the fight against the virus and a boon to the global economy?
In episode 40 of The Flip Side, Head of Research Jeff Meli and Head of Macro Research Ajay Rajadhyaksha debate whether these developments will in fact deliver economic growth and increased consumption or if rising inflation and decreased labour force participation will erode any potential upside.
Jeff Meli: Welcome to our 40th episode of The Flip Side. I’m Jeff Meli, the Head of Research at Barclays. I’m joined today by Ajay Rajadhyaksha, the Global Head of Macro Research. Ajay, thanks for joining me.
Ajay Rajadhyaksha: Thanks for having me, Jeff.
Jeff Meli: All right. Today we’re going to explore the economic significance of the recent development of oral anti-virals for COVID treatment. Now, both Merck and Pfizer have recently introduced their respective COVID pills for people who actually catch the disease.
Now, Merck’s pill has a 50 percent efficacy rate against severe disease outcomes, so let’s put some numbers on that – what does that mean? That means, let’s say for example you’re unvaccinated, and had some high risk factor, and you got COVID.
Before the pill there’d be roughly a 15 percent chance that you would end up inside of a hospital. And with the pill that chance drops by half if you take it early in your infection, say in the first couple of days. Now, the Pfizer numbers are even stronger than that, almost a 90 percent reduction in severe disease outcome, and at least in the initial testing, a 100 percent reduction in mortality.
Ajay Rajadhyaksha: Yes, so I’m really excited about these developments, Jeff. First, and most importantly, they will go a long way towards reducing the adverse health outcomes from COVID. Over 5 million people have died from COVID worldwide, including over 750,000 in the United States. It will be a tremendous achievement to stop this ongoing tragedy.
And quite frankly, I’m also excited for what it means for the global economy. I think we see a resurgence in growth, a lot of concerns around inflation could quickly fade, and this outcome is absolutely not priced into financial markets right now.
Jeff Meli: Well, Ajay, I certainly agree that an effective treatment for COVID that dramatically cuts or even eliminates the most severe outcomes would be something to celebrate. But I’m skeptical about the possibility of the big economic gains that you’re talking about.
We’ve heard this story before, obviously most notably around the vaccines, but also with other treatments like antibodies. I think the balance from what you would call like, “dealing with COVID,” has really played out already.
Ajay Rajadhyaksha: OK, so let me take the other side. Let me tell you why I think this is such a game changer. This is a pill. You feel COVID symptoms, you get a prescription, you pop a pill – and if it’s Pfizer, and given the trial results you are fine a few days from now.
It’s a pill, so it can be shipped anywhere, it can be stored at room temperature, unlike vaccines where storage is a real issue. You do not need a nurse’s help, so you’re not straining health resources like with the monoclonal antibodies. It’s almost like we will turn COVID into getting something like strep throat, very easily manageable.
Jeff Meli: You know, Ajay, the real world doesn’t play out the same way as clinical trials. Now remember, everything that you just laid out was exactly what we were told vaccines were going to do.
The first test showed that the mRNA vaccines were over 90 percent effective at preventing symptomatic disease. We were all going to go back to normal as soon as we got the jabs, and it was going to be the greatest economic expansion ever.
Like the modern version of the Roaring ‘20s, people were stocking up on vintage martini glasses. But instead we got variants, we got resistance to the vaccines, we got breakthrough infections, and now new waves of COVID. Aren’t we just forgetting this recent experience and sort of restating these predictions?
Ajay Rajadhyaksha: So, I have two responses to that, Jeff. First, many of those waves that you mentioned occurred before large swaths of population were really vaccinated. India’s horrific March and April wave, for example. And in some cases the vaccines – like the Chinese version seemed to have far less efficacy than the ones in the West.
Jeff Meli: Well, you’re talking about a couple of emerging market countries, but what about the developed world, which was much quicker on vaccinations? I mean, take Germany for example, 70 percent of the country is vaccinated – that was supposed to be herd immunity. And they’re now in the middle of a massive wave, all time highs in cases.
And the U.S. is similar, we’re still getting 70,000 to 80,000 cases a day – now, that’s down 50 percent from the peak in the summer. But still, a very high number and we’re having over 1,000 deaths a day.
Ajay Rajadhyaksha: That is true, and that is a tragedy. But 70 percent vaccinations, I guess it turns out it still means tens of millions of unvaccinated host bodies for new variants to develop, new waves to occur. And some developed countries, I think, are also dealing with waning immunity from the first shots as time passes.
Jeff Meli: Yes, but why is a pill so different? I mean, realistically storage and those other issues are not what is stopping people in the developed world from getting vaccinated.
Ajay Rajadhyaksha: I think the main difference, Jeff, is that once someone gets COVID they do take the pill even if they refused vaccination. Remember vaccine skeptics don’t general refuse medical intervention. They see doctors, they get surgeries. It is simply vaccine hesitancy that is the issue and one that we admittedly underestimated.
But as long as that is right then with only enough treatment the wider load cannot grow as much, cannot share or transmit to as many people. Which means it directly slows the spread which means fewer host bodies for new variants to develop and so on and so forth.
Jeff Meli: Well maybe. Maybe instead, folks completely bail on the vaccine because now there’s a treatment. And COVID spreads like crazy. People need to quarantine more often because no one get vaccinated. I mean keep in mind neither of us is vaccinated against strep throat to use your earlier analogy.
Pfizer committed to 50 million doses over the next year. But there are 7.5 billion people in the world. If behavior changes because of presumption of access to a treatment we could be as just as bad of a spot as we’re in right now.
But then again what about variants. I mean this time last year Delta was just an airline. Now it’s the most significant strain of COVID. Again the clinical trial and the real world proved to be very different.
Ajay Rajadhyaksha: So you are making a fair point on the numbers. And we will need to keep as much of the population vaccinated as possible. Though if the treatments do work as well as they seem to we can probably afford some increase in vaccine hesitancy.
Also Pfizer now says it will produce considerably more than 50 million by the end of next year. They haven’t given any estimate but it’s higher.
And most importantly, Jeff, both Merck and Pfizer has signed up with the Medicine Patent Pool which means unlike with vaccines where the rollout was a little slower across the world, right now companies in 105 lower income countries can produce those pills at the same time royalty free.
Now as to the science it is admittedly early but it looks like the efficacy of these treatments may be far less subject to variants and mutations. So fingers crossed.
Jeff Meli: All right, well let’s shift to the impact that all of this may have on the economy. Now, the world economy is going to grow above 6 percent this year. That’s the fastest growth we’ve had in decades. Way faster and more robust of a recovery than anything that we have seen since at least the year 2000. I don’t think COVID really slowed us down this year.
The recent slowing that we’re experiencing is not really because of COVID but really because we made up all the ground we lost in 2020. And we’re kind of returning back to a normal environment.
Ajay Rajadhyaksha: So I disagree on that, Jeff. I would argue that COVID was a lingering fear earlier. What I think of as the last mile on services activity; eating out as frequently, taking the same kinds of vacations that you did pre-COVID, behaving the exact same way as before Jan 2020. That really didn’t happen this year. And I’m not even factoring in localized restrictions which still keep occurring in new surges.
We’ve seen that in Europe and in emerging markets especially. Even in the United States schools were not fully open across ’21. Officer workers have not fully returned. All of this is a drag on growth.
So yes the recovery’s been good but it could have been great and that I think is what the pills could ultimately unleash.
Jeff Meli: Well, Ajay, you know the world’s big problem right now isn’t really weak growth or low consumption. It’s high inflation. Consumers still have lots of excess savings. Money they would have spent in 2020 but didn’t. It’s something like $2.5 trillion in excess savings just from U.S. households.
If we unleashed all of this savings, unleashed the economy as you put it, all that happens is the prices rise even faster. There’s actually no place to spend the money right now. We have shortages of cars, chips, smartphones, we’re even being warned that holiday gifts won’t be on the shelves as people start shopping. Where’s all this money going to get spent?
Ajay Rajadhyaksha: So you raise a great point, Jeff. But I would argue that these oral antivirals, these treatments have the potential to both reduce inflation and boost growth at the same time. First goods inflation, like you said, has been what has been driving up prices. Precisely because of the shortages you mentioned. But supply chains have taken it on the chin with periodic shutdowns across different parts of the world.
There has been difficulty getting – hiring workers who are afraid of COVID, et cetera. These supply chain bottlenecks I think will disperse more quickly once treatments are widely available.
Second, consumers have massively shifter over from services to goods but services like travelling, eating out, night life all will come back in a hurry if we are no longer living in fear of breakthrough infection.
So goods will be more available, people will demand less of them, and the single biggest driver of inflation could reverse in a hurry.
Jeff Meli: Well Ajay, you're leaving something out in that narrative. Where are we going to get all these extra workers for the restaurants, the bars, the hotels, et cetera? We actually have a massive shortage of workers already, and a bunch of service companies can’t operate because they can’t hire.
If what you're saying is true and the demand for services spikes we’re just going to replace goods inflation with services inflation. And we’re going to supercharge wage inflation, which underlies all of that because literally every business is going to be trying to hire.
Ajay Rajadhyaksha: So I think that, Jeff, that a lot of people will return to the workforce once COVID concerns have faded. And I admit that is a necessary assumption to avoid the outcome you are talking about, but I do think it’s an easy one to justify.
Our economists just wrote about the labor shortage in our latest Global Outlook, and the missing workers seem like they are coming almost predominantly from married households that had two incomes from the pandemic.
Yes, and employment benefits have run out, but these folks are still generally feeling fairly good about their fiscal situation, and COVID concerns are elevated.
So with these two together they are comfortable staying on the sidelines, at least one of them, but inflation and reduced fears of disease when you combine them, they will be a pretty powerful draw for that second worker in that couple coming back into the workforce next year, and I don't think the worker shortage lasts if these pills are everything that they seem to be.
Jeff Meli: My final issue, Ajay, is that I think that we’re so far into this pandemic experience that most of the transitions that you're talking about at this point are zero sum. So what I mean by that is we don't actually consume more, just differently.
Like the transition you're talking about is that we would replace goods consumption with services consumption. Not necessarily that everybody spends more money, just they spend it a bit differently, maybe a bit more like how we spent it pre-pandemic.
We’ve largely learned to live with COVID. We’re not really stockpiling savings anymore. It is true households have lots of excess savings, but currently we’re spending much closer to normal. Those savings were built up during the height of the pandemic. We’re just buying different stuff now than we used to buy, so I’m not sure why this transition to the pre-COVID patterns still at this point means more growth.
Ajay Rajadhyaksha: So look, you have a point here, and I think your argument is right to a certain extent, Jeff. But I would say that countries that need more international back and forth, who have fewer people vaccinated will be helped disproportionately. You and I are lucky we don't live in such a country.
So in that sense this is a bigger benefit, for example, in emerging economies. And I think there are losers, too, of this. It’s not a surprise that when Pfizer reported its resulted, the same day stocks of vaccine component makers, antibody testers, anything where COVID is a big business, but those stocks drop.
But I think overall it is – I think you underestimate how much this could lift all boats, even in the West. Like I said earlier, our behavior has not returned to pre-pandemic levels. Even on the work front, let alone on the personal front, we are still conducting virtual client conferences. People are flying the London-New York transatlantic route far, far less for work than before.
You think far more about booking a vacation, especially if you are crossing borders. If COVID is no longer a major issue I think that will be a big deal for the world from both a health and an economic standpoint.
Jeff Meli: Well Ajay, if you're telling me I’m going to have to start travelling to London again, I guess I should cross off everything from my holiday wish list that involved updating my home office.
But anyway, I hope you're right about the transition that’s likely to happen. It certainly would be great to move out of the pandemic phase into something more manageable, both from a health standpoint and an economic standpoint.
And obviously it’s early days yet, but we’re going to continue to analyze the implications of the Pfizer and Merck pills for the global economy. Clients can read our latest analysis of the economy and markets in our most recent Global Outlook, “More Good Than Bad”, available on Barclays Live.
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This podcast series features lively debates between Barclays’ Research analysts on important topics facing economies and businesses around the globe.
About the analysts
Jeff Meli is Global Head of Research at Barclays, based in New York. Jeff joined Barclays in 2005 as the Head of US Structured Credit Strategy and has held a number of other senior positions in the research department, including Head of Credit Research and co-Head of FICC Research. Jeff spearheaded the firm’s response to regulatory changes in Research, including MiFID II, and has revamped the department’s approach to content monetisation. Jeff leads the development of the Research Data Science Platform, tasked with integrating new data sets and modern data techniques into investment research. He writes regularly about special topics in credit markets, liquidity, and financial market regulation, and hosts The Flip Side, a podcast covering current events in finance and macroeconomics. Previously, he worked at Deutsche Bank and J.P. Morgan, with a focus on structured credit. Jeff has a PhD in Finance from the University of Chicago and an AB in Mathematics from Princeton.
Ajay Rajadhyaksha is Head of Macro Research at Barclays, based in New York. He oversees the global research and strategy efforts of the economics, rates, FX, commodities, emerging markets, securitised, and asset allocation teams. Since joining Barclays in 2005, Ajay has held various positions, including Co-Head of FICC Research and, before that, Head of US Fixed Income Research and US and European Securitised Research.