Issue of the week: the Omicron threat
The new Covid variant could be an economic game-changer – but not every scenario is negative
Investors around the world suffered “a very black Black Friday”, courtesy of the new Omicron variant, said Jon Sindreu in The Wall Street Journal. The FTSE All World index shed 2.2% in its worse day of trading since October 2020, with bourses in the US, Europe and Asia sustaining heavy selling. It was quite a wake-up call. “The debate about inflation” that has been preoccupying traders all year has now been “obscured by bigger uncertainties”. Worries about overheating, strained supply chains and rising interest rates (all indicators, after all, of an economic rebound) “pale in comparison” with the potential impact of resurgent Covid. The new mutation threatens “to suspend the world in coronavirus limbo”, said Aimee Donnellan on Reuters Breakingviews. “If it evades vaccines, another round of lockdowns could be on the cards at a time when governments and central banks have depleted firepower”.
The debate among traders, as among health officials, is whether existing treatments will be able to combat the new strain, said DealBook in The New York Times. Stéphane Bancel, CEO of vaccine-maker Moderna, sparked another rout this week when he cast doubt on the effectiveness of current vaccines. But set against that is Pfizer’s assessment that its new pill “should work”, and the view of the University of Oxford and BioNTech that the vaccines currently available should continue to prevent severe disease. Whatever the exact medical position, bond investors “appear to be betting that Omicron will slow the economy, but also ease inflation”, currently running at 6.2% in the US and at 4.2% in the UK. It has certainly “clouded the outlook” for the Bank of England’s December interest rate decision, said Mike Sheen on Thisismoney.co.uk. The anticipated hike “may now be delayed until next year”.
It’s not at all clear whether “another major Covid-19 wave” would be inflationary or deflationary, said Robert Armstrong in the FT. Much depends on how regional infection rates and policy responses affect supply and demand. The one given is that central banks will need to watch closely. “They will not want the current ‘growthflationary’ environment to turn into a ‘stagflationary’ one.” We’re all in the dark here, said Ambrose Evans-Pritchard in The Daily Telegraph. Goldman Sachs has gamed four Omicron outcomes: “severe downside”, “downside”, “false alarm” and a surprise “upside” – that a milder new variant “displaces Delta” and turbo-charges growth. “These scenarios have starkly different implications for asset prices and macroeconomic policy over the next year. Get it wrong at your cost.”