Global case numbers suggesting there have so far been 268 million Covid infections can be taken with a huge grain of salt, especially when they indicate that China has reported less than 100,000 positive cases versus 10.6 million in the UK – a country with a population just 5% of the size. European data are likely to be more accurate given the rigorous testing procedures in place across the continent: they point to almost 86 million cases since February 2020 with a quadrupling in the last 12 months.
Germany has led the way in tightening restrictions, with significant curbs on the unvaccinated who will have to contend with curtailed access to restaurants, cinemas, leisure facilities and many shops. This was described by outgoing Chancellor Angela Merkel an act of “national solidarity.” The new Chancellor Olaf Scholz backs a policy of mandatory vaccinations, although this has yet to go through parliament. Indeed, it is notable that the proportion of the German population vaccinated against Covid currently stands at a relatively low 71%, versus 75% in the UK; 77% in France and Italy and 82% in Spain. In response to the threat posed by Omicron, the British government earlier this week implemented what it called ‘Plan B’, carefully avoiding the word lockdown. This entails reintroduction of working from home guidance; the use of facemasks in “most public indoor venues” and a requirement to show a Covid pass in a number of venues, depending on the number of people present and whether it takes place indoors or outdoors.
The Covid policy tracker, published by the Blavatnik School of Government at Oxford University, shows that the restrictions index jumped sharply in Germany and is now back to levels last seen in January (chart). Such a sharp jump has not yet been seen in the UK, although it is likely to edge up over the next few days as the Plan B measures take full effect. A comparison of the political response in the UK and Germany shows considerable differences in approach. Germany has acted quickly and the political consensus is in favour of action to restrict the spread of Covid. But there is mounting political resistance in the UK to further restrictions, driven in part by the defiant libertarian streak which is present in the governing Conservative Party. The Plan B legislation may indeed only pass through parliament thanks to the political opposition which has said it will support the measures.
This is not to say that there are not legitimate concerns about the damage that lockdowns do to the economy. Of course, we do not yet know what the full impact of the Omicron variant will be but the evidence suggests that it is the most transmissible variant to date. Case numbers look set to rise sharply across Europe and the government responses are unlikely to leave the economy unscathed. Even before the latest concerns about the Omicron variant, the UK economy had lost considerable momentum. GDP in October rose by just 0.1% m/m taking the annualised 3-month growth rate down to 3.2%. Ironically, such growth as there was in October came from output in human health activities, which grew by 3.5% m/m due mainly to a continued rise in face-to-face appointments at GP surgeries. It is a pretty strange sort of economy where growth is being driven by numbers of sick people going to see their doctor. It is still possible that output will get back to pre-Covid levels by Q1 2022, as the BoE projected in November, although this will depend on the extent of any anti-Covid measures.
Omicron has muddied the likely monetary policy response ahead of the BoE’s final MPC meeting of the year on Thursday. After considerable criticism that the BoE had led analysts up the garden path by not raising interest rates last month, it was widely believed that it would do so in December. That expectation has faded and rates are tipped to remain on hold next week. Given the uncertainty surrounding the economic situation, that would seem to be a prudent move. The consensus GDP growth projection for 2022 has slipped from 5.6% in August to 5.1% last month and the likelihood is that it will dip further (for the record, my own projection looks for a growth rate in the range 4% to 4.5%). There are many who believe that high inflation warrants monetary tightening. However this is to miss the cause of the recent inflation spike which is the result of supply chain difficulties. Tighter monetary policy today will do nothing to tackle this problem although once some of the Covid-related uncertainty passes there is a case for modest policy tightening.
Markets appear to be taking the view that the Omicron variant will slow economic activity rates and thus cool some of the inflationary pressures. That is not what happened a year ago when the emergence of the Delta variant made these problems worse rather than better. This is a reminder that one of the bigger dangers we face is complacency. The Omicron variant represents a new strain rather than a new disease, so the threat is perceived to be lower than it was in March 2020. That may be true but it may turn out to be wrong if the transmissibility rate is so much higher and the virus mutates yet again. Public health experts are thus warning that we once again need to deploy the toolbox developed in 2020, which entails significant economic disruption.
Quite how long we can go on doing this depends on the duration of the Covid pandemic. Based on the evidence derived from this paper, the average duration of global pandemics over history is around 6 years. It is not an edifying thought that we are barely two years into the Covid outbreak.
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