OMICRON is the fifth and latest Covid-19 variant of concern today. Three doses of a vaccine (or two doses plus immunity gained from infection) may produce sufficient antibodies to quash this unwelcome viral newcomer.
Omicron, found today in close to 100 countries, has sparked deep concern since it was reported to the World Health Organisation (WHO) in November.
Close to 50 mutations are now clustered on the spike protein, rapidly filling hospital and paediatric wards around the world. Continuing major outbreaks have compounded those fears.
The surge pointed to greater transmissibility. As I see it, recent reports paint the portrait of a somewhat milder disease, with shorter hospital stays, fewer patients needing oxygen, and fewer children progressing to severe illness. Still, this could be misleading: true, the early wave was mostly in younger people, including university students.
The full clinical picture will only become clear once the new virus has cycled through the successive stages of infection, illness and death in all age groups.
So far, WHO has not reported any deaths specifically due to Omicron. Laboratory studies now show that vaccine-induced antibodies can blunt the Omicron onslaught.
While antibodies produced by the Pfizer vaccine were not as effective against Omicron as against the original virus, antibodies produced by people who had been vaccinated and previously infected, showed relatively high neutralisation. According to Pfizer, three doses of its vaccine could neutralise the virus – but also that two doses produce far fewer antibodies.
Still, a milder disease can end up killing more people if it is more transmissible – translating into illness that can scale quickly into unsustainable hospital numbers.
A striking analogy of the Omicron wave: this new variant makes the road a bit icier, which makes wearing seat belts, etc more important. The risk of crashing still remains low, but exercising caution today on vaccines, boosters testing, ventilation and masking might prevent a devastating situation closer to Christmas.
Risk
WHO has declared that Omicron poses a “very high” global risk. It is too early to say whether the mutations on Omicron’s spike protein help make it more infectious or lethal than the dominant Delta strain.
The epidemiological picture will become clearer with time. But the threat of a wave of illness spreading from one country to the next is once again hanging over the world economy, amplifying three existing dangers:
Firstly, tighter restrictions in the rich world will damage growth; secondly, the variant can raise already high inflation.
This risk looms largest in the United States; and thirdly, the final danger is the least well appreciated: a slowdown in China, the world’s second-biggest economy.
However, it’s not all bad news. The link between gross domestic product and restrictions on movement and behaviour is now estimated at one-third of what it was.
Some vaccine-makers expect fresh data to show that today’s jabs will still prevent the most severe cases of the disease.
And, if they must, firms and governments will be able to roll out new vaccines and drugs some months into 2022.
Even so, Omicron (or, in the future, Pi, Rho or Sigma) threatens to lower growth and raise inflation.
To be sure, it is a reminder that the virus’s path to becoming an endemic disease will not be smooth.
Impact
The pandemic had earlier-on caused a fearsome economic slump; but now a weird, exhilarating boom is in full swing.
Oil price has soared, while restaurants, and haulage firms are having to fight and flatter to recruit staff.
As listed firms signal that profits will hit an all-time high this year, stockmarkets are on a tear. Some indicators now suggest that global growth is at its highest since the exuberant days of 2006. Of course, any escape from Covid-19 is a cause for celebration.
But today’s booming economy is also a source of anxiety, because of three fault lines.Together, they will determine whether the most unusual recovery in living memory can be sustained.
First, the line dividing the jabs from the jab-nots. Only those countries with rising vaccinations will be able to tame Covid-19. So far, only one in four people around the world has had a first dose of vaccine.
Only one in eight are fully protected. Even in the US, some under-vaccinated states remain vulnerable.
Second, the line running between supply and demand. Shortages of microchips have disrupted the manufacture of electronics and cars, just when consumers want to binge on them.
The cost of shipping goods from China to ports on US’ west coast has quadrupled from its pre-pandemic level. Even as these bottlenecks are unblocked, newly open economies will create fresh imbalances.
House prices have surged, suggesting that rents will soon start to rise, too. That could sustain inflation and deepen the sense that housing is unaffordable.
Third, the line over the withdrawal of stimulus. At some point, state interventions that began last year must be reversed. This is a delicate task, without causing a flap in capital markets by tightening too fast.
China, whose economy did not shrink in 2020, offers a sign of what is to come: it has tightened credit policy this year, slowing its growth. Households are unlikely to get a fresh infusion of “stimmies” in 2022. Deficits will contract rather than expand, dragging down growth.
So far, economies have largely avoided a wave of damaging bankruptcies. Pessimists worry about a return to 1970s-style inflation (or a financial crash) or that capitalism’s underlying energy will be drained by state handouts.
Such apocalyptic outcomes are possible; but as I see it, they are not likely.
Instead, a better way is to examine how the three fault lines interact differently in different economies. The US, with abundant vaccines and enormous stimulus, is at the biggest risk of overheating.
In recent months, inflation has reached levels not seen since the early 1980s. Its labour market is coming under strain as economic activity shifts.
Workers are reluctant to return to work, which has pushed up wages.
All this suggests that the US economy will run hot, with continual pressure on the Federal Reserve (Fed) to tighten policy.
Elsewhere in the rich world, the picture is less exuberant. It includes some jab-nots, like Japan, which has fully vaccinated less than 15% of its population.
Europe is catching up on vaccines; but its smaller stimulus means that inflation has not reached US levels.
In the UK, France and Switzerland, 8% to 13% of employees remained on furlough schemes at mid-year. In all these economies, the risk is that policymakers overreact to temporary, imported inflation, withdrawing support too quickly.If so, their economies will suffer. Just as the eurozone suffered after the financial crisis of 2007-09.
Even as Covid-19 weakens their recoveries, emerging markets face the prospect of higher interest rates at the Fed. That tends to put downward pressure on their currencies as investors buy the dollar, raising the risk of financial instability.
Their central banks do not have the luxury of ignoring temporary or imported inflation. Brazil, Mexico and Russia have since raised interest rates, and more with follow. The combination of jabbing too late and tightening too soon can prove to be painful. In this weird boom, however, the fault lines have to be taken seriously.Stagflation
Stagflation of the 1970s is back on economists’ minds today, as they confront strengthening inflation and disappointing economic activity.
Stagflation is a particularly thorny problem because it combines two ills – high price increases and weak growth – they do not normally go together.
So far this year, global growth has been robust and unemployment rates, though generally still above pre-pandemic levels, have fallen. But the recovery seems to be losing momentum, fuelling fears of stagnation.
Covid-19 has led to factory closures in many parts of South-East Asia, hitting global industrial production.
US consumer sentiment is sputtering. Meanwhile, after a decade of sluggishness, price pressures are intensifying. Inflation has risen above central-bank targets across most of the world. It exceeds 3% in UK and the eurozone, and 5% in US.
The economic picture is not as bad as in the 1970s. But what worries stagflationists is that an array of forces threatens to keep inflation high even as growth slows. Indeed, these look eerily similar to the factors behind the stagflation of the 1970s.
First concern: the world economy is once again weathering energy-and food-price shocks. Global food prices have risen by roughly a third over the past year.
Gas and coal prices are close to record levels in Asia and Europe. Stocks of both fuels are disconcertingly low in China and India. Rising energy costs will exert more, upward pressure on inflation, and further darken the economic mood worldwide.
Second: other costs are rising too: shipping rates have soared, because of a shift in consumer spending towards goods, and Covid-related backlogs at ports. Workers are enjoying greater bargaining power, as firms facing surging demand struggle to attract sufficient labour.
Third, stagflationists see another similarity with the past in the current policy environment: they fret that macroeconomic thinking has regressed, creating an opening for sustained inflation. The bruising experience of stagflation in 1970s helped shift thinking, producing a generation of central bankers determined to keep inflation in check.
Now, as in the 1970s, the worriers, warn governments and central banks may be tempted to solve supply-side problems by running the economy even hotter, yielding high inflation and disappointing growth. These parallels aside, energy and food-price shocks typically worry economists because they could cause spiralling price rises.
Moreover, stagflation in the 1970s was exacerbated by a sharp decline in productivity growth across rich economies. Since the worst of the pandemic, however, productivity has strengthened: output per hour worked in US grew at about 2% in the first half of this year, roughly double the average rate of the 2010s. Booming capital spending could mean such gains are sustainable.
A second important break with the 1970s is that central banks have neither forgotten how to rein in inflation nor lost their commitment to price stability.
What next for the world economy then if it does not face a 1970s re-run? Rocketing energy costs pose a serious risk to the recovery. Soaring prices – will dent households’ and companies’ budgets, and hit spending and production. That will come just as governments withdraw stimulus and central banks countenance tighter policy. A demand slowdown could relieve pressure on supply-constrained sectors.
A third important respect in which the global economy has changed since the 1970s is in its far greater integration through financial markets and supply chain: trade as a share of global gross domestic product, for instance, has more than doubled since 1970.
The uneven recovery from the pandemic has placed intense stress on some of the ties binding economies together. Yes, the world has changed dramatically since the 1970s, and globalisation has created a vast network of interdependencies. Like it or not, the system now faces a new, unique test.
What then are we to do
As the global economy has rebounded from the impact of the coronavirus pandemic, inflation has risen faster than many central bankers expected, driven by soaring energy prices, resurgent demand, delays in the delivery of goods, and shortages of materials and products.
Supply-chain bottlenecks were holding back the recovery of the world’s largest economy and have helped to fuel more elevated price pressures as they have intensified. The combination of strong demand for goods and the bottlenecks has meant that inflation is running well above target. It will continue to do so in the coming months before moderating, as bottlenecks ease. Demand is increasing so rapidly that supply cannot fully follow the rapidly increasing demand. This is likely to be prolonged somewhat.
As I see it, the Fed now stands ready to act in the event that inflation proves more “substantial” than forecast. It is “close” to beginning to scale back its US$120bil (RM504bil) asset purchase programme.
The eurozone economy appear stoke back from the brink, but not completely out of the woods. So far, no signs exist of supply chain disruptions feeding “second-round effects”, such as significantly higher wage demands.
Financial markets have been whipsawed since mid-December, with the new Omicron coronavirus variant sweeping the globe just as the Fed signalled its willingness to accelerate US monetary policy tightening. Dizzying swings in global stock markets have wiped trillions of dollars off valuations only to partially reverse soon after – shifts that underscore how investors must now navigate an increasingly cloudy global economic outlook.
The jolt of volatility underscores how investors are bracing themselves for the beginning of the Fed’s retreat from its massive stimulus programme, which has helped to propel stocks to records heights. A new strain of coronavirus has raised the stakes in a year when investors have pumped hundreds of billions of dollars into equities. The spread of Omicron has threated to complicate the Fed’s pullback, potentially undermining the economic recovery that had given the US central bank confidence to rein in its stimulus programme, as it focuses on the threat of hot inflation.
Indeed, elevated levels of inflation may also warrant a faster tapering. Investors have been left grappling with conflicting forces, with tightening financial conditions – caused in part by market volatility – hitting up against fears that the spread of Omicron could curtail economic growth, typically a cue for monetary policy easing. While the US has been at the centre of the recent market tumult, volatility has also been increasing in Europe and Asia.
A measure of expected volatility has hit its highest level in a year, and has remained elevated. Similar indices for Hong Kong’s Hang Seng and Tokyo’s Nikkei 225 have also ticked up. It is the natural consequence of the combined events of the emergence of Omicron and the Fed’s pivot. Their combination has created the volatility. We will have to wait for the dust to settle, to see the final outcome.
Former banker, Harvard educated economist and British Chartered Scientist Prof Lin of Sunway University was chairman, Rio International Experts Group on Finance for Sustainable Development, UNCSD, New York, 1994-2004. Feedback is most welcome. The views expressed here are the writer’s own.