A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’.

It will take weeks to establish how great a risk is posed by the Omicron variant. The hope is that, like the Beta (first documented in South Africa) and Gamma (Brazil) variants before it, Omicron will fail to become dominant. Those earlier variants were unable to outcompete the Alpha (UK/Kent) and now the dominant Delta (India) variant.
High levels of vaccinations in the West and rising levels of boosters mean Omicron faces greater obstacles than its predecessors. Moreover, it has been identified at an earlier stage in its spread than the Delta variant earlier this year. The swift imposition of restrictions, including on travel, is unlikely to halt the spread of the new variant, but should slow it and allow more time for research. 

A few nervous weeks are in prospect. Last Friday saw a global sell off in equities as investors processed the possible effects of the new variant. The UK FTSE 100 index dropped 3.6%, its biggest daily decline in more than a year. After several months in which the pandemic has played a lesser role in driving financial markets, it has returned with a vengeance. 

The emergence of Omicron creates new uncertainties for central banks. Faced with rising inflation the US Federal Reserve made the first step to winding down, or tapering, its programme of quantitative easing last month. A week ago it looked quite likely that the Bank of England would raise interest rates for the first time in more than three years at its meeting on 16 December. Given the potential threat posed by Omicron a ‘wait and see’ approach to tightening monetary policy looks the safer path now. Certainly bond markets think that interest rates are likely to stay lower for longer because of the emergence of Omicron. 

Since July the UK has had less onerous levels of COVID-related restrictions than a number of larger European nations, including Germany, France, Italy and the Netherlands. That is starting to change with the introduction of new travel restrictions and testing requirements, and the return of mask mandates in shops and public transport. 

Studies of earlier waves of the virus show that human behaviour often changes spontaneously in response to new risks, before restrictions come into effect. We are likely to get some of the first indications of the effect of the new variant from high frequency data on personal mobility and retail footfall. 

Since late summer the global recovery has faced headwinds from slowing Chinese growth, supply shortages and higher inflation. Omicron could add significantly to those headwinds, or make little difference. 

Economies are arguably better placed to cope with new restrictions, having learned ways of maintaining activity in the face of high case rates and restrictions. Set against this the extraordinary fiscal support that helped us through the wave of cases in spring 2020 and last winter, particularly the furlough scheme and the uplift to income support, are no more. Reimposing full ‘work from home’ lockdowns and restricting access to retail and hospitality venues would be difficult unless accompanied by the reintroduction of such assistance. Governments are fervently hoping such measures will not be necessary.