A recurring theme of this newsletter has been that we are not experiencing a normal recovery. This business cycle is still, to a large extent, pandemic driven. In the spirit of Value Added, there is very little point in me speculating on the epidemiology of this new strain. But the economics of it clearly matter. The consistent line from the epidemiologists now is that it too early to tell how Omicron will play out.
The uncertain path of the virus makes the path of the economy equally uncertain, and I suspect it is that uncertainty which has driven sharp falls in risk assets. I find it hard to read more into recent equity market moves than that. Even amid the uncertainty though, the early consensus appears to be that the new variant is a negative for the global economy but perhaps not a huge one.
I am a bit less optimistic. The recovery might indeed shrug Omicron off, but the downside case is clear. Working through the impact on the British economy is instructive and brings home how uncertain the situation is. The new international travel rules β a PCR test within two days of arrival followed by 10 days of isolation if positive coupled with a tougher approach to visitors from Southern Africa β may deter a few business travellers and tourists, but again this should be relatively small in the context of overall GDP.
The requirement to isolate for ten days, regardless of vaccination status, if you come into contact with an Omnicron case is potentially a bigger deal. The ultra-bearish case of a repeat of the kind of restrictions imposed last Spring β which feels far from likely - would not see the same kind of collapse in GDP witnessed then.
April , to paraphrase TS Elliot, was the cruellest month. But by the third lockdown, which began in late December , the economy had adapted. Manufacturing and construction activity, much of which closed in Spring , maintained more output. More retailers managed to switch their business from the high street to online.
