Categories: Business

How Omicron will affect the economy

How Omicron will affect the economy was the immediate response of many people when they heard that a new variant of Covid-19 has been detected in the country. The threat of rising cases and further lockdowns, as well as cancellations from foreign tourists will likely wipe out all the progress made during the year.

According to the Bureau for Economic Research (BER) at Stellenbosch University, the projected quarterly real gross domestic product (GDP) recovery in the fourth quarter of 2021 from the possible contraction in the third quarter was already facing downside risks after the prolonged steel sector strike in October and load shedding in October and November.

Now the possible increase in Omicron-driven Covid-19 cases, potentially stricter lockdown measures and foreign tourist cancellations will add to the downside pressure on GDP in the fourth quarter. In addition, this adverse effect could spill over into economic activity in the first quarter of 2022, depending on the length and severity of the fourth wave in South Africa.

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Effect of Omicron on policy and inflation

These latest Covid developments could also affect policy, the BER says.

“We have argued that the Reserve Bank’s monetary policy committee could decide to pause the interest rate hiking cycle at their January 2022 meeting, partly because the country could be at the peak of a fourth wave by then.

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“This likelihood has increased over the past week regarding fiscal policy, while further economic pain, including potential hospitality sector job losses, increases the already high probability of an extension of the social relief of distress grant after March 2022 when it is supposed to end.”

Inflation could also be affected and the BER says the impacts could range from a sustained weaker rand exchange rate in a risk-off global environment that is countered by a lower oil price if the variant spreads across the world and dampens oil demand, as well as delayed price effects from a full reopening of domestic contact-intensive industries.

ALSO READ: WHO names new variant Omicron and classifies it as a variant of concern

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Omicron effect on global markets

Global financial markets also did not escape the announcement of a new variant. The BER says it had a major negative impact on global financial markets on Friday as investor risk appetite deteriorated dramatically.

“With falls of 4% in some cases, global stock markets declined by the most in a year. The share prices of major airline companies plunged amid concerns that a more infectious Covid-19 variant would curtail air travel, with the Brent crude oil price particularly hard hit, falling by more than 10% on Friday.”

These abrupt market moves were also compounded by low liquidity after the Thanksgiving holiday in the US and a shortened Black Friday trading day. Although the oil price had regained some lost ground in Asian trade this morning, increasing by 3.5%, Asian stock markets were down even further after Friday’s sharp losses, the BER pointed out.

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Domestic markets

Domestic markets also felt the pain on Friday, with the rand exchange rate under significant pressure, down 2.5 to 3% on the week. The weaker global stock markets and a sharp decline in SA leisure and hospitality stocks dragged down the JSE Alsi, while long-term government bond yields rose sharply.

According to the BER, the rand decline last week brought its losses against the US dollar so far in November to almost 7%, or R1.

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“The currency losses on Friday happened despite a somewhat weaker US dollar against the euro. The dollar was an exception as there was a flight to perceived safer assets in general.

“This flight resulted in some gains for the gold price on Friday, as well as a notable decline of around 15bps in the 10-year US Treasury yield, which reversed the recent trend where US Treasury yields rose amid more hawkish commentary from US central bank officials on a possible faster reduction in the pace of bond buying.”

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‘We were caught off-guard’

James Glover, managing executive for markets at Nedbank Corporate and Investment Bank, also says the Omicron variant caught everyone off guard.

“Markets had been complacent about the current situation, with the delta variant spreading but with vaccines doing their job of preventing severe disease and death.”

He says the knee-jerk reaction of clamping down on travel from Southern African landed particularly poorly in South Africa and internationally, although he expects some easing of pinning it on South Africa as many countries are detecting community spread of Omicron already.

ALSO READ: US praises SA for ‘transparency’ in flagging Omicron variant

What the president said

About President Cyril Ramaphosa’s speech on Sunday night, Glover says he said little we did not know already and he suspects the president’s pleas for the unvaccinated to get to their nearest vaccination site will fall on deaf ears.

“There will probably be a need for more interventionist measures to get the numbers up, whether as vaccines mandates supporting business in its efforts to enforce vaccine mandates, or the current European approach of targeted lockdowns on the unvaccinated.”

Glover points out that there is little appetite and most importantly, political capital, for lockdowns. He suspects the threshold will be set very high to go back to anything like what we saw during the Beta and Delta outbreaks, which will likely give some sectors a reprieve compared to previous outbreaks, but not enough to save the hospitality sector over the festive season as the growing momentum in global travel is brough to a screeching halt.

“The uncertainty over whether vaccines will be effective against Omicron certainly will not encourage more people to be vaccinated. Most theoretical models point to immune escape but, as was the case with Beta and Delta, we will have to wait for actual data.”

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Hospitalisations and deaths will determine recovery

He says the market will keep a very close eye on real world data in Gauteng and particularly the hospitalisations and death statistics for the vaccinated.

“If we do not see a material difference in these statistics compared to delta or beta, we can expect the recovery to continue unabated.

“However, if we do see a difference, we will be in for a rough ride as global growth gets downgraded again and countries scramble to stay ahead of it. Either way there will likely be new global discussion on how we live alongside this disease.”

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By Ina Opperman
Read more on these topics: business newseconomyOmicron