What will be the economic impact of the Omicron variant of Covid-19?

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by Shaun Richards

As we come towards the end of the year and approach Christmas we see that economies are being given another jolt. The new Covid-19 variant called Omicron has led to a wave of new restrictions and in some places lock downs. These will have economic consequences and we can look at one via a piece of news just released.

The RRR cut is a comprehensive reduction. Except for some county-level legal person financial institutions that have implemented a 5% deposit reserve ratio, the deposit reserve ratio is generally reduced by 0.5 percentage points for other financial institutions, taking into account participation in inclusive finance orientation………….The relevant financial institutions uniformly implement the most favorable deposit reserve ratio, so that the total release of the RRR cut will be The long-term funding is about 1.2 trillion yuan. ( People’s Bank of China)

So China has just eased monetary policy which is the opposite direction to where we are supposed to be heading. For newer readers China often acts on the quantity o money rather than the price or interest-rate. So their 1.2 trillion Yuan will flow into the economy and will also reduce some interest-rates. As to the Carly Simon question or Why? We are told this.

The first is to effectively increase the long-term stable funding sources of financial institutions to support the real economy while maintaining reasonable and abundant liquidity, and enhance the financial institutions’ ability to allocate funds. The second is to guide financial institutions to actively use the RRR cut funds to increase support for the real economy, especially for small, medium and micro enterprises.

But we have the opening salvo that there are now more concerns about economic weakness in this last quarter of 2021 and the opening of next year. China is of course claiming that Omicron is not an issue there but via exports it is one if you believe China has no or very few cases.

Bank of England

We heard from policymaker Michael Saunders on Friday.

 In particular, at the December meeting, a key consideration for me will be the possible economic effects of the new Omicron Covid variant, and the potential costs and benefits of waiting to see more data on this before – if necessary – adjusting policy.

This was a significant intervention because he was one of the two members who voted for an interest-rate rise in the UK in November. So rather than more voting for it this time around could it be even less? Anyway this bit is rather curious as UK bond yields have fallen substantially over the past month.

At the same time, even with the recent rise in gilt yields, financial conditions are considerably looser than late last year and early this year

Then he told us something that applies to interest-rate rises but not to cuts.

In considering if and when to adjust rates, there is always a case to wait and see more data.

Then he played the Omicron card.

 At present, given the new Omicron Covid variant has only been detected quite recently, there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy.

He also notes that we might change our behaviour and via that weaken the economy. The emphasis is mine.

Apart from the direct impact of any additional public health measures on economic activity, aggregate demand and supply could also both be affected by increased precautionary behaviour as well as effects on supply chains and the composition of spending.

This provides us with a problem as we try to figure out how much this will be? The situation had previously looked quite strong ( a group of friends and I planned to go to a pub in the City Thursday week and were told it was fully booked), but now places are seeing cancellations.

The Office for National Statistics cited OpenTable data showing that, relative to its pre-pandemic average, the number of seated diners in the week to November 29 (last Monday) was the lowest since May 17. That covered a few days after the new variant was first reported. Tim Rumney, chief executive of Best Western Hotels, noted widespread cancellations of Christmas parties, dinners and room bookings and warned that this Christmas could be another write-off. ( The Sunday Times)

In an ordinary year December would be quite a boost for the hospitality industry but now? It looks set to be a fair bit quieter as we face up to the prospect of GDP falling this month and maybe this quarter. There is an irony to this as we have just reached the point where we could sing along with Maxine Nightingale.

Ooh, and it’s alright an it’s coming on
We gotta get right back to where we started from
Love is good, love can be strong
We gotta get right back to where we started from

Some are suggesting a 1% to 2% fall in GDP in December but perhaps they have forgotten something will be happening the other way. This is the half a million or so vaccinations which are happening, mostly of third or booster doses.

The NHS Test and Trace adjustment for September 2021 was £1,400 million, up from £1,200 million in August as the number of coronavirus tests increased by approximately 30%. The vaccine programme’s adjustment for September 2021 was £200 million, down from £300 million in August as the number of coronavirus vaccinations fell by approximately 40%.

Not only will the numbers be much higher in December and for the end of November but the price of the vaccines will be quite a bit higher too as we switch from the cheaper AstraZeneca to much more expensive Moderna and Pfizer. It seems madness to me that we will record a GDP improvement by buying something more expensive as opposed to one made here but there you go.

See also  WSJ: China’s Fading Recovery Reveals Deeper Economic Struggles.

However in spite of the undercut there which will presumably be added to by the Test and Trace programme which must be flat out we have to expect a GDP decline in December and in some places for the quarter as a whole. This seems most likely for Austria due to the restrictions there. On the other side of the coin or rather Atlantic I have to wonder what the Atlanta Federal Reserve is thinking here?

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2021 is 9.7 percent on December 1, up from 8.6 percent on November 24.


We could see an impact here too if there are more supply shortages. That will only be in force in scale should we see more lock downs although the campaign against the unvaccinated could create inflation by exacerbating labour shortages. On the other side of the coin we now have a price for crude oil that is some US $10 or so weaker than before. So it is a complicated picture before we get to  energy prices which are surging again in Europe but falling in the US.


It is not much of a Christmas message to be expecting another slow down but that is what we presently face. This is a contrast to what the surveys which are supposed to keep us in touch are saying.

As a result, output growth in the final quarter of 2021 remains well on track to exceed that seen in Q3 (average reading 56.7……..The overall speed of recovery looks to have accelerated in comparison to the third quarter of 2021, with output growth mostly driven by services. ( IHS Markit )

The reality is that we can expect a contraction as the impact of the scaremongering that has gone on applies. I say that because so far the impact of the Omicron variant looks to be mild which in many ways is good news.



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