A A BIT MORE than a year after the first success of a Covid-19 vaccine in a clinical trial, much of the world has felt a sense of fear. The Omicron variant of the coronavirus, which was first publicly identified on November 24th, may be able to bypass the defense mechanisms built up by vaccination or infection with Covid-19. The World Health Organization has stated that Omicron poses a “very high” global risk. The boss of Moderna, a vaccine manufacturer, warned that existing vaccinations could fight against the strongly mutated new variant. Given the dire prospect of further lockdowns, closed borders, and nervous consumers, investors have responded by selling stakes in airlines and hotel chains. The price of oil has plummeted by around $ 10 a barrel, a drop that is often associated with an impending recession.
As we explain this week, it’s too early to say whether the 35 mutations in Omicron’s spike protein help make it more contagious or deadly than the dominant Delta strain. As scientists analyze the data in the coming weeks, the epidemiological picture becomes clearer. But the threat of a wave of disease spreading from one country to another once again hangs over the global economy, compounding three existing threats.
The first is that tighter restrictions will affect growth in the rich world. In the news about the variant, countries tried to block travelers from southern Africa, where it was first identified. Israel and Japan have closed their borders completely. Britain has imposed new quarantine requirements. The pandemic abruptly ended a free-running era of global travel. Restrictions have been eased this year, but the past week has shown that gates slam much faster than they open.
The spread of Omicron is also likely to tighten the limits of freedom of movement domestically. Europe throttled much of its domestic activity even before the variant hit the market in an attempt to combat Delta’s rising infections. Italy keeps most unvaccinated people out of indoor restaurants, Portugal even requires vaccinated people to take a negative test to enter a bar, and Austria is completely banned. The long-awaited recovery of the rich world’s vast service industries, from hospitality to conferences, has just been postponed.
A one-sided economy fuels the second danger that the variant could fuel the already high inflation. That risk is greatest in America, where President Joe Biden’s excessive fiscal stimulus overheated the economy and consumer prices rose 6.2% yoy in October, a three-decade high. But inflation is uncomfortably high elsewhere at 5.3% worldwide, according to Bloomberg data.
You’d think Omicron would lower inflation by dampening economic activity. In fact, it could do the opposite. Prices are rising in part because consumers chew for goods and disrupt the world’s supply chains for everything from Christmas lights to sneakers. The cost of moving a container from factories in Asia to America remains extremely high. In order for headline inflation to decline, consumers will need to shift their spending back to services such as tourism and hospitality. Omicron can delay this. The variant could also trigger further lockdowns in key production hubs such as Vietnam and Malaysia, making delivery bottlenecks worse. And cautious workers can delay their return to work and drive wages higher.
That may be one reason why Federal Reserve chairman Jerome Powell hinted on November 30th that he was in favor of tightening monetary policy. This attitude is correct, but it has its own dangers. The spillover effects could hurt emerging markets, which are prone to capital outflows and falling exchange rates if the Fed tightened.
Emerging economies have larger reserves and are less dependent on foreign currency debt than they did during the Fed’s botched attempt to unwind stimulus during the 2013 taper wantrum. But they also have to deal with Omicron at home. Brazil, Mexico and Russia have already hiked interest rates, which will help stave off inflation but could slow growth as another wave of infections looms. Turkey has done the opposite, cut interest rates and as a result faces a currency collapse. Other emerging economies could face an unenviable choice.
The last threat is least appreciated: a slowdown in China, the world’s second largest economy. Not so long ago it was a shining example of economic resilience to the pandemic. But today it is grappling with a debt crisis in its huge real estate industry, ideological campaigns against private companies, and an unsustainable “zero covid” policy that keeps the country isolated and subject to draconian local lockdowns when cases arise. Although the government is considering stimulating the economy, growth has slowed to around 5%. Aside from the brief shock at the start of the pandemic, this is the lowest in about 30 years.
Should it turn out that Omicron is more portable than the earlier Delta variant, this will make China’s strategy more difficult. With this strain spreading more easily, China will have to go even harder with each outbreak to eradicate it, affecting growth and disrupting supply chains. Omicron could also make China’s exit from its zero-covid policy even more difficult, as the wave of infections that will inevitably result from the outbreak of the virus could be larger and put a strain on the economy and the health system. This is especially true given China’s low infection-induced immunity and how well its vaccines work.
Annoying variations and worrying weeks
It’s not all gloomy. The world will not see a repeat of spring 2020 with breathtaking slumps GDP. People, companies and governments have adapted to the virus, which means the connection between GDP and movement and behavior restrictions are a third of what it was, says Goldman Sachs. Some vaccine manufacturers expect new data to show that vaccinations today will still prevent the most severe cases of the disease. And if they have to, companies and governments will be able to bring new vaccines and drugs to market for a few months by 2022. Even so, Omicron – or in the future Pi, Rho or Sigma – threatens to slow growth and raise inflation. The world has just received a rude reminder that the virus’s path to endemic disease will not be smooth. ■
This article appeared in the Leaders section of the print version under the heading “Danger Ahead”