The world is grappling with record cases of Covid-19 as Omicron spreads like no variant of the virus before it. Yet some senior European figures, such as Spanish premier Pedro Sanchez, Switzerland’s interior minister, and the UK’s education secretary, have suggested in the past week that, as Omicron appears to cause less severe illness than earlier strains, it’s time to start thinking about the coronavirus as an endemic disease that we’ll just have to live with, like the flu.
In the Republic the move by the Government to relax close-contact rules from Friday – against the backdrop of a surge in cases leading to chronic staffing shortages across the healthcare system and wider economy – is also a tacit acknowledgment that we’re heading into a different phase.
The World Health Organisation (WHO) cautioned this week, however, that it is too early to declare that the disease – which has resulted in 320 million recorded cases and 5.5 million deaths over the past two years – has gone from being pandemic to endemic.
“Endemicity assumes that there’s stable circulation of the virus, at predictable levels and potentially known and predictable waves of epidemic transmission,” Catherine Smallwood, a senior emergency officer at WHO Europe, said on Tuesday, as the agency warned that more than half of Europe could be infected in the next six to eight weeks amid “a new west-to-east tidal wave seeping across the region”.
Still, financial market soothsayers on Wall Street and in the City of London are looking further ahead.
Deutsche Bank strategists said in a report this week that there is little doubt that the rapid spread of Omicron “will slow large swathes of the economic landscape” in the coming months, but the pandemic is likely to transition into an endemic as the year progresses.
Bank of America economists said they believe that the global economy will endure a “roughly two-month shock”, with the main problem being the sheer amount of people quarantining hitting labour supply and general output.
It doesn’t help that for now we’re seeing varying approaches to the handling of the latest phase. China’s “zero Covid” policy, for example, currently has about 20 million people confined to their homes, having put three cities into lockdown since late last month.
“In the near term Omicron poses downside risks to our outlook. Even if there are no lockdowns we should expect short but sharp economic disruptions in most parts of the world,” the Bank of America economists, led by Ethan Harris, said in a report this week.
However, they said there is a chance that Covid will be endemic by the time the Omicron wave subsides.
“That is, the virus will continue to circulate in the population but there will be high levels of immunity and a very large majority of cases will be mild. Thus many aspects of life and economic activity will normalise,” they said.
“There will still be a risk of new variants, but the hope is that they will not be able to outcompete Omicron because it is already so transmissible and vaccine-resistant.”
If this scenario plays out Bank of America reckons that there will be “meaningful upside to our medium-term economic outlook”, which currently calls for global gross domestic product (GDP) to advance 4.3 per cent this year and 3.5 per cent in 2023, following a 5.8 per cent rally in output last year from the initial Covid shock.
The big risks hanging over the economy and financial markets are the threat of policy error as central banks deal with the spectre of inflation, which has reared its ugly head in the past year.
There are a few schools of thought about what a move by the coronavirus to an endemic stage will do for inflation, which was soaring as of last month at a near 40-year high of 7 per cent in the US and a record 5 per cent across the euro zone.
One is that inflation decelerates as Covid restrictions continue to be rolled back, easing global supply bottlenecks. Another is that a move into the next stage will accelerate demand, leading to a repeat of the surge in consumer prices that we saw from the rapid reopening of the global economy in the first half of last year.
The big fear would be that if China tries to maintain its policy of suppressing all cases at a time when other parts of the world continue to loosen restrictions, it could affect global supply chains further.
As things stand financial markets are pricing in three rate hikes from the US Federal Reserve this year, starting from March, as the world’s most influential central bank tries to rein in inflation. The Bank of England decided last month that it could wait no longer, raising its main rate from 0.1 per cent to 0.25 per cent.
The European Central Bank (ECB) president Christine Lagarde and her chief economist Philip Lane may be sticking doggedly to the line that rate hikes in the euro zone are unlikely this year, in the belief that price growth will ease off as 2022 progresses. But the ECB’s vice-president, Luis de Guindos, conceded on Thursday that euro zone inflation is not going to be as “transitory” as forecast only some months ago. “The assessment of risk for inflation is moderately tilted to the upside over the next 12 months,” he said.
Central banks are entering dangerous territory. If they move too slowly inflation may become entrenched, which could force monetary authorities to act aggressively further down the line, potentially triggering recession.
If central banks move too quickly – especially when governments are easing back on emergency business and household supports, and there remains a risk of more potent Covid variants appearing – it could derail the current recovery.
Omicron may be the beginning of the end of the pandemic. But the hard work is only starting for central banks.