Economic Recovery Expected to Withstand Omicron Restrictions

Strategic Insights -

Data showing strong levels of spending since the Omicron variant was discovered in late November, alongside evidence that companies and people have adapted their operations to Covid-19 restrictions, have encouraged economists to think that the impact of Omicron on the economy will not be as severe as earlier waves of infection. The UK government's plan B restrictions, which include extending the legal requirement to wear face masks, introducing Covid passports or negative lateral-flow tests for large events, and recommending work-from-home for certain industries, are unlikely to disrupt economic growth significantly.

Key Takeaways:

  • The UK government's plan B restrictions are expected to have a small impact on the economy, with economist Allan Monks estimating the economic impact to be around 0.5% of GDP for December and January.
  • Many businesses and their people have learnt how to work remotely at scale and at speed during the pandemic, making the transition to work-from-home measures relatively smooth.
  • The spending foregone due to cancelled Christmas parties and other events has not dented economic activity significantly, with credit and debit card purchases in the week ending December 2 showing a 21% increase from pre-pandemic levels.
  • The Bank of England is unlikely to raise interest rates in the near future, with economists expecting the Monetary Policy Committee to signal a delay in rate hikes due to the uncertainty surrounding the Omicron wave.
  • The Institute of Economic Affairs has warned that plan B restrictions could cost the economy £4 billion a month, but most economists believe this estimate exaggerates the economic impacts.
  • The economic recovery from coronavirus has been robust, with household spending recovering strongly in the week ending December 5 to be 10.7% higher than the equivalent week in 2019.

Statistics:

  • Credit and debit card purchases in the week ending December 2 were 21% up from pre-pandemic levels according to the clearing house automated payment system.
  • Households spent 21% more on credit and debit cards in the week ending December 5 compared to the same period in 2019, according to Fable Data.
  • The economic impact of Omicron is estimated to be around 0.5% of GDP for December and January, according to Allan Monks at JPMorgan.
  • The estimated cost of plan B restrictions to the economy is £4 billion a month, according to the Institute of Economic Affairs.
  • The Bank of England is unlikely to raise interest rates in the near future, with a low probability placed on a rate rise next Thursday.

Sources:

  • "UK faces winter of restrictions" by CHRIS GILES, ECONOMICS EDITOR (The Financial Times, December 2021)
  • ONS (Office for National Statistics)
  • Fable Data
  • JPMorgan
  • Citi
  • Bank of America
  • Institute of Economic Affairs
  • Goldman Sachs
  • EY Item Club