Can Omicron spur a Great Depression?
The emergence of a new Covid-19 variant -- Omicron -- has caused quite a stir globally just as many nations are on the recovery track from the Delta variant. Scientists worry that the latest strain first detected in South Africa has as many as 50 mutations, 32 of them on the spike protein which theoretically makes it much more transmissible than the Delta variant.
South Africa made an announcement about the new variant on Nov 24 after noticing that Covid cases jumped from 550 a day to almost 4,000. In less than a week, Omicron started showing up around the world from England to Hong Kong and from Denmark to Australia. It travels even faster than the news.
Questions of concern are not just limited to the transmissibility of the virus, but rather the severity of the disease and the effectiveness of existing vaccines. There is no definitive answer to such questions yet as health scientists need time to conduct studies and the current sample size is too small to be conclusive.
Amid all the uncertainty, global oil prices tumbled over 10% after the news broke and stock markets tanked around the world. Of course, many people want to know what impact the new variant will have on the world and national economies, which were previously projected to see a full recovery next year.
I will try to answer some of these economic concerns, but first I have erred on the side of caution by making a few assumptions about what impact the new variant will have on health policy.
If Omicron, despite the apparent ease with which it is transmitted, does not result in more lockdowns of countries and cities, the global and indeed most national economies will continue on their recovery paths as expected. Lockdowns are unlikely to occur unless Omicron wreaks more damage than earlier variants. Healthcare systems will just have to deal with larger volume of patients. Countries will choose to strengthen their healthcare systems and tighten social-distancing measures rather than lock down their economies, a policy that has proven disastrous for the livelihoods of many citizens.
On top of this, existing vaccines must be proven to be effective against Omicron in terms of reducing severe disease and death. If not, the whole world will need a new kind of vaccine and the process of getting jabbed will all have to start over again. What will happen during the re-vaccination period? Lockdowns, probably, because older vaccines would no longer provide protection against this new variant.
However, certain industries could still be severely affected, especially international travel as fewer people would risk getting sick in foreign lands.
Many manufacturers have already sent out reassurances that their vaccines could still be effective against Omicron. Some are working on newer generations of their vaccines that are specially formulated to fight Omicron, and these could come out as soon as early next year. I give full benefit of the doubt to the claim that such new and effective vaccines can be formulated, but I'm deeply concerned about how long it will take to get people revaccinated.
The United States took about six months to vaccinate half of its population (with just one dose) while the United Kingdom was able to cover 70% of its people in the same period. If there is a need for revaccination, major economies will require three to six months to get the job done. It will take longer if two jabs are required. During this period, countries would have no choice but to close their borders and lock down their economies. If not, Omicron infections would spread faster than a wildfire on a windy day, quickly overwhelming their healthcare systems. Those haunting images of people waiting to die in hospital corridors would come flooding back.
Developing countries would not only have to revaccinate but would also have to wait in line to be supplied with the new "Omicron vaccines". As before, no doubt, developing countries that own the vaccine technology would hoard their vaccines until their collective population of 1 billion is adequately protected. This could make for protracted lockdowns in developing countries.
What would happen to the global and national economies while everyone is waiting to get their Omicron jabs? In all likelihood, it would not just be a recession but a global depression. The world economy has been severely battered by previous rounds of the pandemic and could hardly bear another massive outbreak. Here are two specific reasons why.
First, governments around the world would run out of money to support economies while they were waiting for their revaccination drives to wrap up. Previous Covid-19 outbreaks caused the world economy to shrink 3.1% in 2020. It has now been projected that the global growth rate will rebound to 5.9% in 2021, according to the International Monetary Fund (IMF).
The reason for this sharp rebound is not due to strong economic fundamentals but because governments around the world have spent an average of 16% of their GDP to stimulate their respective economies. They forked out this much just to get 5.9% GDP growth back in return. This indicates just how fragile the state of the world economy is right now.
If Omicron were to cause more lockdowns, most governments would have to allow their economies to slip into negative growth again. Take the case of Thailand as an example. The government borrowed 1 trillion baht in fiscal 2020 and 1.475 trillion baht in fiscal 2021 to shore up the economy.
That puts its total borrowing at about 16% of GDP, which is the world average in terms of recent stimulus spending. But how much more would the government be able to borrow to alleviate the economic impact of potential Omicron lockdowns before it ended up bankrupting the entire economy?
Second, most consumers would run out of money to support domestic consumption. The 16% of GDP stimulus spending by governments would not be enough to sustain the situation. Consumers around the world have already withdrawn the equivalent of 4% of GDP on average, according to World Bank data, from their savings to support themselves since the pandemic first broke out.
The situation is even more grim in Thailand. While consumers elsewhere used up 4% of GDP in terms of their spent savings, Thais withdrew the equivalent of 6.5%. As this data needs to be updated, things could be even worse than they look.
In summary, most governments are already broke and the same can be said for Joe Average. Another lockdown could be a death sentence for many businesses and households.
If an Omicron outbreak were to trigger this, negative economic growth may only be the tip of the iceberg. It could also affect the relocation of global investment capital arising from supply chain disruptions, a key factor behind today's rapidly rising inflation. Another round would be very hard to swallow.
At the onset of pandemic, Kristalina Georgieva, the IMF's managing director, said: "This is a crisis like no other." This sentence may get resurrected if we see a new round of lockdowns.
Chartchai Parasuk, PhD, is a freelance economist.