Sunday, December 05, 2021
A rollercoaster year ends with a jolt of uncertainty
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

It is at this time of year that I feel sorry for economic forecasters. They have to put together a coherent story for 2022 and yet, as 2021 draws to a close, a significant new uncertainty has emerged. I feel a bit sorry for myself, because I will soon be doing “year ahead” pieces, though I have plenty of opportunities from week to week to nudge things in one direction or another as events unfold.

The uncertainty is the Omicron variant of the coronavirus. It may be, as some early evidence suggests, that its effects are mild and that vaccines remain effective against it, but we do not yet know.

The dilemma was summed up by the Organisation for Economic Co-operation and Development (OECD) in presenting its new Economic Outlook. Its central forecast was positive on both the global recovery and on the UK. Its prediction of UK growth of 6.9 per cent growth this year and 4.7 per cent next, would make this year the strongest in the post-war period. 2021 and 2022, taken together, would also be the best two-year run in the post-war era. We’ll gloss over 2020, when the economy suffered its biggest fall since 1921.

But the OECD also talked of two possible Omicron scenarios. “One is where it creates more supply disruptions and prolongs higher inflation for longer,” said Laurence Boone, its chief economist. “And one where it is more severe and we have to use more mobility restrictions, in which case demand could decline and inflation could actually recede much faster than what we have here.”

The uncertainty has already affected market expectations about what the Bank of England might do next. Before Omicron, a rate rise at the monetary policy committee’s next announcement on December 16 was regarded as a near-certainty. Now it is seen as less than 50-50, despite an intensification of inflationary pressures.

The Bank will not want Omicron to damage the recovery but will not mind too much if it dampens inflation, though it may not be possible to have one without the other. Omicron uncertainty has pushed oil prices lower, with Brent crude falling from more than $80 a barrel to $70 or less.

The emergence of the new variant re-opens one of the great economic debates about the pandemic. Were the enormous falls in economic activity we saw last year mainly as a result of lockdowns and other restrictions? Or did they arise from behavioural changes by people and businesses, as individuals sought to keep themselves safe, and businesses tried to protect their employees, customers and reputations?

The answer is that the economic effects resulted from a combination of the two, with the debate being about how much weight to put on each. It was clear that behaviour was changing quite dramatically before the first UK lockdown began in March last year, though that might have been because it was widely anticipated. When restrictions have been eased it has taken time for activity to return to normal, and in some cases it has never done so.

Restrictions introduced so far in response to Omicron will only have a limited impact on economic activity, though it will have a further significant effect on the travel sector. Lockdowns introduced elsewhere in Europe will slow but not stop its recovery, as noted last week.

So we have to look at the behavioural changes. They are apparent in a flurry of cancellations of events, including Christmas parties, and it seems in people pulling out of restaurant and other bookings. Tentative evidence from Google trends and elsewhere that people’s appetite for going out for entertainment and hospitality has already waned.

The Office for National Statistics reported OpenTable data showing that, relative to its pre-pandemic average, the number of seated diners in the week to November 29 (last Monday) was the lowest since May 17. That covered a few days after the new variant was first reported. Tim Rumney, chief executive of Best Western Hotels, reported widespread cancellations of Christmas parties, dinners and room bookings and warned that, as in 2020, this Christmas could be a write-off.

Business confidence has also weakened and, according to one survey, half of smaller businesses fear a further lockdown. Tony Danker, director-general of the CBI, said in a speech the other day that the optimism of the summer among firms had given way to firefighting over shortages of people and supplies, rising costs and Covid.

With this particular variant, as I say, it may be a fuss about not very much, though it may not, and we do not yet know. The bigger point, however, is that it has reinforced expectations that Covid is going to be around for some time yet. The great worry, that a variant will emerge on which existing vaccines are ineffective has been brought into focus by this one.

The government’s ordering of 114 million additional doses of vaccines that can be tweaked against variants is reassuring but is also a reminder that the official view is that the public will need protecting for quite some time yet, and that booster vaccines may become an annual event.

Gauging these confidence and uncertainty effects is not easy, although some economists are already pencilling in a drop in monthly gross domestic product (GDP) for this month, ending the year on a sour note. “At present we could be looking at a decline of between 1 and 2 per cent this December, before hopefully the economy recovers again,” says David Owen of Saltmarsh Economics, who successfully monitored the economy from the start of the pandemic using real-time data.

These uncertainty effects are hitting hardest those sectors which have suffered most during the pandemic, notably travel and hospitality. They come at a time when most coronavirus support, including the furlough scheme, has been wound down. It is not only economic forecasters who could do without this sting in the 2021 tail.