Less severe variant inspires optimism that the UK is now in the Covid ‘end game’
Source - Daily Telegraph - 16/01/22
Boris Johnson may feel he has little choice when deciding whether to ditch Plan B.
Just as persuasive as the extremely positive omicron data coming out of UK hospitals is a need for Johnson to placate furious Tory MPs after the latest and most damaging episode of ‘Partygate’.
The anti-lockdown Covid Recovery Group of Conservative MPs have made clear they will not accept anything less than zero restrictions by the end of January as the PM’s future hangs in the balance.
“We need a ‘learn to live with it day’,” says Mark Harper, the Tory MP who chairs the group.
“As we head into what will be a difficult few months for many, a great way to help people with the cost of living would be to get the economy motoring. That starts by removing Plan B Covid restrictions.”
Steve Baker, fellow Tory MP and the group's deputy chairman, adds that “opposition to Plan B will only have grown by the end of January”.
Whatever the Prime Minister’s motivations, an end to vaccine passes and, in particular, homeworking advice will be a big step towards finally reaching economic normality.
Despite rising cases, “omicronomics” offers global leaders a tantalising scenario where the strain becomes a blessing in disguise for the economy – setting a ceiling for restrictions and restoring business and household confidence. Forecasters believe it gives the global economy a way out of the pandemic.
The new variant has broken the link between cases and deaths. Ministers in the UK and Spain are starting to talk up the prospect of Covid moving from a pandemic to endemic, where the virus persistently circulates at low or moderate levels and becomes a problem more akin to the flu.
Optimism is building among global forecasters that a light at the end of the tunnel is nearing, with one bullish Wall Street analyst telling investors it is “darkest before dawn”.
Removing the threat of lockdown would finally offer enough certainty to allow businesses to kickstart investment and the UK’s consumers to finally unleash £260bn in lockdown savings.
“For the first time, there's a genuine end game that I think is emerging,” says Sanjay Raja, UK economist at Deutsche Bank.
“As the economy starts to move on from the pandemic, this could breathe new life into private sector capital expenditure plans going forward. Omicron may be the tide in terms of moving to the new normal.”
Economic forecasters as well as epidemiologists are poring over data from the UK, the first developed economy and vaccinated population to face the variant. It appears to confirm positive signs in South Africa where its younger and earlier infected population had left lingering doubts on the severity of omicron.
While official cases peaked at near 250,000 a day in Britain, daily hospitalisations have plateaued at half of last winter’s high and deaths are still a fraction of last January's grim toll.
A dip, then a sharp recovery
If the health impact is a short, sharp shock, so will be the economic hit, City analysts believe.
In the very near term, omicron is a drag on economies with many suffering another output dip. Live economic signals tracked by forecasters, such as card spending and footfall, point to a modest retreat in activity since the onset of omicron, a setback after the economy reached pre-pandemic levels for the first time in November.
That is expected to be followed by a rapid recovery, returning the UK economy to its pre-omicron path with no extra scarring.
It is typical of the economic blows dealt by Covid, which have diminished with every wave, while survey data suggests household confidence has largely held up in the face of record cases.
The end to Plan B restrictions would mean GDP rises 0.2pc in the first quarter rather than remain flat, according to Pantheon Macroeconomics.
James Smith, ING economist, says on monthly GDP losses: “If you aggregate December and January we’re probably some way below a 1pc cumulative hit to GDP. It’s a fairly mild impact so far.
“Certainly, it's not going to be very long lasting. I would imagine that most if not all [lost activity] would have been picked back up again by February or March.”
The post-omicron outlook for global and UK economies could be brighter still if it signals an end to the pandemic.
A milder version of Covid will make future outbreaks more manageable for health systems, meaning tough economic restrictions could be left behind.
“If this scenario plays out, we see meaningful upside to our medium-term economic outlook,” says Ethan Harris, global economist at Bank of America, who expects global growth to decelerate to 4.3pc this year.
“The biggest beneficiaries would be the service sectors that were battered by the pandemic, for example airlines and lodging. It is always darkest before dawn.”
Currently, economists polled by Bloomberg expect GDP growth in the UK to slow from 6.9pc last year to 4.8pc in 2022 as the economy exceeds pre-pandemic output levels. Forecasters say this brighter scenario opens up the potential for an upside surprise or, at the very least, the removal of the biggest downside risks.
The prospect of stop-start restrictions in future Covid waves had dampened spending, but a revival of confidence in the longer-term economic outlook could unlock subdued business investment and huge lockdown savings built up by households.
“For businesses, knowing that we may be at the end of the pandemic, that should give them more confidence to invest in the economy,” says Raja. “We know that businesses have been shy in investing for the last couple of years.”
Meanwhile, households in the UK sitting on a £260bn pile of lockdown savings may ditch their cautious attitude if normality finally returns.
An end to the threat of restrictions would restore confidence in making big ticket purchases and bookings, such as holidays abroad. Bank of America survey data suggests plans for major purchases in the UK, such as cars and household applications, are already recovering from their Plan B dip while unemployment fears are also in retreat again.In
China's zero-Covid catastrophe
While omicron offers an alluring vision of a recovery finally unchained from Covid anxiety, there is one big exception: China.
The world’s second-largest economy was a key driver of the world’s post-financial crisis recovery but now it could be the weak link.
“China stands out because it's had the zero-Covid policy [which] is emblematic really of the Chinese Communist Party's approach to Covid,” says Shamik Dhar, chief economist at BNY Mellon.
“It leaves it majorly vulnerable both because its vaccines aren't as effective and because the level of natural immunity is much lower in China.”
The faster-spreading omicron is testing China’s ultra-strict Covid policy, which has put 20m into strict lockdowns and forced infected people into huge quarantine camps to try and contain the variant.
More severe outbreaks could lead to widespread lockdowns in China and there is little sign of a reversal from its “zero Covid” policy as Beijing attempts to ensure a smooth Winter Olympics in February.
After flaunting its early success, experts expect President Xi Jinping to stick with the tough stance as he goes for a third term later this year.
The economic impact of tough measures enforced by Beijing could ripple out beyond China.
BNY Mellon’s Dhar adds: “That's the one big global threat from omicron it seems to me: the idea that potentially we could see more of the supply disruption that we've seen in the second half of last year simply because Chinese health policy is so different to everyone else’s.”
Authorities have clamped down hard on outbreaks at Chinese ports and factories, shuttering them and deepening global trade woes. More closures risk worsening the supply chain bottlenecks that have helped to propel inflation to a 10-year high in the UK and a near 40-year peak in the US.
It increases the threat of high inflation becoming entrenched, particularly if persistent cost pressures cause expectations for prices to surge.
Back in the UK, the post-Covid boom threatens to be dampened by households’ disposable incomes being hit by rocketing energy bills, high inflation and tax rises. While some pressures on families' bills and the public finances would be eased by Covid’s retreat, Deutsche’s Raja warns that living cost and supply woes will still weigh on the economy in 2022.
“Beyond this year, there's a lot of positive elements coming through in terms of thinking about any potential future waves and how the Government deals with them,” he says.
“It’s clear that both consumers and businesses are better able to deal with restrictions and simply just living with the pandemic."
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