29 November 2021

Omicronomics – how will the new Covid variant affect the economy?


Here are some first thoughts on ‘Omicronomics’, or the economic impact of the new Covid restrictions announced for England over the weekend.

The main short-term risk to the UK economy comes from the tightening of the self-isolation rules: contacts of those testing positive for the Omicron variant will have to stay at home for up to ten days, regardless of their vaccination status.

This could trigger another ‘pingdemic’, disrupting schools and businesses in the crucial pre-Christmas period. The pingdemic in July probably reduced UK GDP by about 0.5% that month. The impact of a repeat could now be greater, because the rules are being tightened in school term time and when labour shortages are a bigger problem.

This suggests the new self-isolation rules could knock as much as 1% off GDP in December, costing the economy at least £2 billion. Of course, some might still argue that this would be a fair price to pay to prevent a far more damaging fourth wave, and to protect the NHS. But that would be a big call to make on the basis of what we know about Omicron so far.

The new rules on international travel could also have a significant impact. So far, only a handful of countries in Africa have been added to the ‘red list’ with the most stringent restrictions, including eleven expensive nights of hotel quarantine.

However, all international arrivals will have to take a PCR test within two days of arrival and self-isolate until they receive a negative result. Many people will decide it is simply not worth the risk, or the additional financial costs, which could be substantial.

This is not necessarily a disaster. Few foreign visitors are coming here at the moment anyway, and UK residents who might have holidayed abroad could spend more money at home instead. But this could be the final straw for some UK firms who rely on visitors from overseas.

Making face coverings compulsory again in shops and public transport is unlikely to be a game-changer. People are now used to wearing face coverings in these settings and many have continued to do so, even when the rules were relaxed.

Consumers are also now familiar with internet shopping, and many more traditional ‘high street’ businesses have an online presence too. Crucially, the new rules on face coverings will not apply to the hospitality sector, which could have been hit hardest.

Much will still depend on how the latest developments affect consumer and business confidence. Even without another official lockdown (which thankfully does not seem to be on the cards), people can voluntarily change behaviour in ways that have much the same effect.

Some people will be reassured by the measures that have been taken, while others may simply not care anymore, due to a combination of Covid fatigue and denial.

But many will also worry that this is the first step towards another lockdown, or be concerned that the new measures do not go far enough. This is already the line being taken by many media commentators, activist doctors, and the Labour Party.

The key factor to watch here will be the new information on Omicron itself. There is some early evidence from South Africa that the symptoms are mild, like flu. Most experts remain confident that the current vaccines will provide good protection. The stepping up of the booster programme is the most important and helpful measure that the government has taken.

Assuming this reassuring news is confirmed in the coming days and weeks, sentiment should turn quickly, and the new rules could be relaxed in plenty of time for Christmas.

In the meantime, the UK does at least start from a better position than many European countries, which were already reimposing lockdowns in response to a surge in cases of the Delta variant.

In the UK, more people appear to have acquired a high degree of immunity from past infections or from the booster programme, and both hospitalisations and deaths remain low compared to previous waves.

In summary, the new Covid restrictions announced over the weekend are unlikely to derail the UK economy, but it is still worth asking whether they are proportionate. Hopefully, we won’t have to go through all this again every time someone finds another ‘variant of concern’.

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Julian Jessop is an independent economist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.