The Economist - Main report: December 4th 2021
The world economy: Danger ahead
Omicron amplifies three dangers that stalk the global economy
A LITTLE MORE than a year after the first success of a covid-19 vaccine in a clinical trial, a
sense of dread has struck much of the world. The Omicron variant of the coronavirus, first
publicly identified on November 24th, may be able to circumvent the defences built up by
vaccination or infection with covid-19. The World Health Organisation declared that Omicron
poses a "very high" global risk. The boss of Moderna, a vaccine-maker, warned that existing
jabs may struggle against the heavily mutated new variant. Faced with the ghastly prospect of
yet more lockdowns, closed borders and nervous consumers, investors have reacted by selling
shares in airlines and hotel chains. The price of oil has slumped by roughly $10 a barrel, the
kind of drop often associated with a looming recession.
As we explain this week (see Briefing) it is too early to say whether the 35 mutations on
Omicron’s spike protein help make it more infectious or lethal than the dominant Delta strain.
As scientists analyse the data in the coming weeks, the epidemiological picture will become
clearer. But the threat of a wave of illness spreading from one country to the next is once again
hanging over the world economy, amplifying three existing dangers.
The first is that tighter restrictions in the rich world will damage growth. On the news of the
variant, countries scrambled to block travellers from southern Africa, where it was first
identified. Israel and Japan have closed their borders entirely. Britain has imposed new
quarantine requirements. The pandemic abruptly ended a freewheeling era of global travel.
Restrictions were being eased this year, but the past week has shown that gates are slammed
shut much faster than they are opened.
The spread of Omicron is also likely to intensify limits on free movement at home. Europe was
curbing many domestic activities even before the variant arrived, in order to fight surging
infections of Delta. Italy is keeping most of the unvaccinated out of indoor restaurants, Portugal
requires even those who are vaccinated to have a negative test to enter a bar and Austria is in
full lockdown. The long-awaited recovery of the rich world’s huge service industries, from hospit
ality to conferences, has just been postponed.
A lopsided economy fuels the second danger, that the variant could raise already-high inflation.
This risk looms largest in America, where President Joe Biden’s excessive fiscal stimulus has
overheated the economy and consumer prices rose by 6.2% in October compared with the
previous year, a three-decade high. But inflation is also uncomfortably high elsewhere, at 5.3%
globally, according to Bloomberg data.
You might think Omicron would lower inflation, by depressing economic activity. In fact it could
do the opposite. Prices are rising in part because consumers are bingeing on goods, bunging up
the world’s supply chains for everything from Christmas lights to trainers. The cost of shipping a
container from the factories of Asia to America remains extraordinarily high. For overall inflation
to recede, consumers need to shift spending back towards services like tourism and eating out.
Omicron may delay this. The variant could also trigger more lockdowns in key manufacturing
nodes such as Vietnam and Malaysia, aggravating supply glitches. And cautious workers may
put off their return to the labour force, pushing up wages.
That may be one reason why Jerome Powell, the chairman of the Federal Reserve, indicated on
November 30th that he favours monetary tightening. That stance is right, but brings its own
dangers. The spillover effects could hurt emerging economies, which tend to suffer capital
outflows and falling exchange rates when the Fed tightens (see Finance & economics section).
Emerging economies have greater reserves and depend less on foreign-currency debt than they
did during the Fed’s botched attempt to unwind stimulus during the taper-tantrum of 2013. Yet
they must also cope with Omicron at home. Brazil, Mexico and Russia have already raised
interest rates, which helps stave off inflation but may reduce growth just as another wave of
infections looms. Turkey has done the opposite, cutting rates, and faces a collapsing currency as
a result. More emerging economies could confront an unenviable choice.
The final danger is the least well appreciated: a slowdown in China, the world’s second-biggest
economy. Not long ago it was a shining example of economic resilience against the pandemic.
But today it is grappling with a debt crisis in its vast property industry, ideological campaigns
against private businesses, and an unsustainable "zero-covid" policy that keeps the country
isolated and submits it to draconian local lockdowns whenever cases emerge. Even as the
government considers stimulating the economy, growth has dropped to about 5%. Barring the
brief shock when the pandemic began, that is the lowest for about 30 years.
If Omicron turns out to be more transmiss ible than the earlier Delta variant, it will make
China’s strategy more difficult. Since this strain travels more easily, China will have to come
down even harder on each outbreak in order to eradicate it, hurting growth and disrupting
supply chains. Omicron may also make China’s exit from its zero-covid policy even trickier,
because the wave of infections that will inevitably result from letting the virus rip could be
larger, straining the economy and the health-care system. That is especially true given China’s
low levels of infection-induced immunity and questions over how well its vaccines work.
Vexing variants and worrying weeks
It is not all gloom. The world will not see a re-run of the spring of 2020, with jaw-dropping
drops in GDP. People, firms and governments have adapted to the virus, meaning that the link
between GDP and restrictions on movement and behaviour is one-third of what it was, says
Goldman Sachs. Some vaccine-makers expect fresh data to show that today’s jabs will still
prevent the most severe cases of the disease. And, if they must, firms and governments will be
able to roll out new vaccines and drugs some months into 2022. Even so Omicron--or, in the
future, Pi, Rho or Sigma--threatens to lower growth and raise inflation. The world has just
received a rude reminder that the virus’s path to becoming an endemic disease will not be
smooth.
The Economist Group © 2021 The Economist Intelligence Unit Limited. All rights reserved.
About us | Privacy policy | Terms of access | Cookies | Contact us
