4 ways Omicron Can Affect the Economy

The Spotlight

15 minutes read

Dec 7, 2021

physical gold bars and coins with omicron covid-19 viruses floating over gold safe boxes

The new omicron Covid-19 variant took the world markets and physical gold investors by surprise. Amid rising inflation and strained supply chains, how can it affect the global economic recovery and gold price?

A little over a year after the first success of a Covid-19 vaccine in a clinical trial, the new variant, known as omicron, is now spreading across the globe.

More and more countries, including the U.S., France and Belgium, are reporting their first cases, and market participants are rattled by the possibility that this new wave could hurt the global economic recovery.

Faced by the ghastly prospect of new lockdowns and closed borders, some investors have already reacted by selling shares in travel and tourism companies. And the price of oil plunged about $10 a barrel in a drop that was associated with a looming recession.

With markets now facing weeks of uncertainty, lets see what we know about omicron, how dangerous it might be, and how it could affect not only global economic growth, the supply chain, and inflation, but also your own investments and the price of gold.

What we know about omicron

Omicron is the latest coronavirus variant to pose a “very high” global risk, according to the WHO.

First spotted in South Africa on November 24th, there are fears it may be able to break all the defenses built up so far by Covid-19 vaccines.

Scientists say it will be a few weeks before we can have clearer answers about this new variant, but some initial data has already been released revealing some worrying information about the omicron variant.

Omicron seems to have many mutations, some of which have never been seen by researchers before.

This gives it two “superpowers” at once:

  • It might spread faster than the currently dominant delta strain.
  • Apparently, people who’ve already had Covid are now 3 times more likely to get re-infected by omicron.

But the good news is that early reports suggest omicron might be less severe than some of its predecessors. South African doctors who have handled cases of the omicron variant say it has been mild so far but acknowledged that this opinion is not final.

All this uncertainty about the omicron variant took investors off guard, leading to a major crash in the global stock and oil markets in late November, reflecting market concerns over the effect new potential Covid restrictions could have on economic growth.

What the Omicron variant means for the global economy

From what we’ve seen so far, omicron has been spreading pretty fast: it has already been detected in more than 20 countries in North and South America, Europe and Asia, with some top officials ringing the alarm over its' potentially devastating consequences to the world economy.

Janet Yellen, The U.S. Treasury Secretary was one of the first top financial officials to voice her concerns, saying: “Hopefully it's not something that's going to slow economic growth significantly. There's a lot of uncertainty, but it could cause significant problems.”

She singled-out 3 key problems for the global economy:

  • Slower economic growth.
  • More supply chain issues.
  • Even higher inflation.

While these threats can have a major effect on the economy, financial markets, and investor sentiment, consumers and investors also have another, equally important, question:

Is the spread of omicron already affecting us?

But before turning to that question, let’s look at each of these potentially life-turning issues in more detail.

Omicron could slow global growth

With omicron, a sort of déjà-vu is taking place, with countries rushing to block travelers from South Africa, where the strain was first identified, as soon as the news of this new variant broke.

Many fear that the spread of omicron is also likely to put limits on free movement at home. Indeed, even before the omicron variant appeared, some European countries were already curbing many domestic activities in order to contain surging infections from the Delta variant.

For instance, Austria went into full lockdown, Portugal now asks for a negative test to enter a bar, even if you are vaccinated, and Italy has banned unvaccinated people from restaurants and concerts.

In short, the past few weeks have shown that the long-awaited global economic recovery might just have been postponed.

And the IMF thinks so, too.

In its recent outlook, the financial watchdog sees global growth dropping from 5.9% this year to 4.9% in 2022.

"Even before the arrival of this new variant, we were concerned that the recovery … is losing somewhat momentum," IMF Managing Director Kristalina Georgieva said.

Even China, which not so long ago was a shining example of economic resilience against the Covid-19 pandemic, is struggling today with a debt crisis in its vast real estate sector. And if Omicron turns out to be more transmissible than the Delta variant, it risks making the situation even worse, analysts say.

These well-founded concerns are additionally fueled by persisting supply chain disruptions and inflation increasing rapidly all over the world.

The omicron variant could impact the supply chain

Before the omicron variant of the virus has even emerged, global supply chains were hanging by a thread.

With months of non-stop factory shutdowns, labor shortages, ports closing down, logistical bottlenecks, increased demand for goods, and the holiday season now approaching, saying the global supply chain is in chaos is no understatement.

And there are reasons to believe that it could now face a devastating new blow: the new Omicron Covid variant.

Economists have already labeled it as another “test of resilience” for already-strained supply chains: “Supply chains remain vulnerable to pandemic-related disruptions, with the Omicron variant highlighting that the crisis is not yet over,” said Sian Fenner, lead Asia economist at Oxford Economics.

This year, many of us have been affected, one way or another, by massive supply chain disruptions, created by massive freight container shortages, floods, and Covid infections leading to international port closures.

Your iPhone order is taking months to arrive? That’s the supply chain.

Your new couch won’t be ready before next summer? That’s the supply chain.

Prices on some import products are strangely going up? You know who to blame.

And if the situation seems to have stabilized recently, it’s still far off from pre-Covid times, according to analysts.

A note from research company TS Lombard pretty much sums it all: “Most governments in the region are likely to resist re-imposing severe restrictions, but the bottom line is that supply chains will remain under pressure while the Covid threat persists.”

And if omicron makes this supply chain crisis worse, it will most likely mean one thing: higher inflation.

Omicron could make inflation worse

To put it simply, prices are rising for a few reasons and one of them is because as consumers binge on goods they clog up the world’s supply chains with everything from trainers to Christmas lights.

But with the strained supply chain we described above, the cost of shipping a container from Asian factories to the United States and Europe is now extremely high.

So, for overall inflation levels to drop, consumers need to shift their spending from online purchases to local services like eating out and tourism. But the problem is, omicron may delay this.

Some believe this risk looms largest in the United States, where consumer prices have recently hit a three-decade high. And inflation is also uncomfortably high elsewhere, reaching 5.3% globally, according to Bloomberg.

Statistics released by OECD are telling the same story: ongoing supply chain disruptions and new Covid-19 waves could cause higher inflation to last longer.

Here is what OECD chief economist, Laurence Boone, has to say:

“The strong rebound we have seen is now easing and supply bottlenecks, rising inflation, and the continuing impact of the pandemic are clouding the horizon. The risks and uncertainties are large - as is being seen with the emergence of the Omicron variant - aggravating the imbalances and threatening the recovery.”

In other words, it’s looking more and more likely that we’ll face pandemic-related closures, labor shortages, and growing commodity prices for a little longer than expected. And all this is bound to further affect our prospects and everyday lives.

How the Omicron variant is already impacting us

Inflation and supply chain problems are definitely the key topics you will see discussed by economists and in news headlines.

And while these are very real issues for our economies, for a regular consumer or an everyday investor, inflation and strained supply chains might just sound like buzzwords or obscure economic terms that tell little about how this situation could affect their lives and wallet.

Meanwhile, the struggle out there is real and worries are mounting: the stock market fell 1,000 points last week after a knee-jerk reaction from investors freaking out about the new COVID mutation.

While we have just been coming to terms with Delta, omicron struck, leaving many of us wondering what will happen next, and if this variant could be the one to push us over the hedge.

As already mentioned, much remains unknown about Omicron, and no one knows for sure what exactly is going to happen.

But, from what it looks like, surging infection numbers in Europe and increasingly cautious mood from consumers and markets alike might end up dealing a new blow to many businesses we use or invest in every day.

Airlines and hotels are worried about the impact of the Omicron variant

The travel industry is already scrambling to curb the impact of the omicron variant on its networks after multiple countries, including Japan, the U.S., and the U.K. have imposed new travel restrictions to contain the spread of the virus.

"The hope for U.S. and European carriers had been that opening the Atlantic would allow them to operate long-haul routes on a cash-positive basis, but border restrictions make it even harder to get the demand in," said James Halstead, managing partner at consultancy Aviation Strategy.

But the strongest warning came from Emirates airline President Tim Clark who said that omicron could cause “significant traumas” for the aviation industry as it is will hit the peak December travel season.

And the airline business is not the only one that might be affected: the hotel business might be the victim too.

In the U.K., fears about the Omicron Covid variant have led to a stream of cancellations at hotels, with many customers changing their Christmas plans.

Jonathan Fletcher, who manages a Best Western hotel in Dorset, South West England, has said customers have been phoning all week to cancel their meals and parties: "This Saturday night, we were supposed to have 100 people eating in our restaurant. Now there'll only be 12.”

And if we’ve all canceled a few dinner reservations of our own, people calling off their Christmas parties and canceling their travel plans are strong indicators of the rising levels of fear and uncertainty over the current situation in the global economy.

Consumer sentiment hits new lows

And while a growing number of businesses and services are fearful of what’s to come, surging costs for food, gas, and housing are also eroding consumers’ purchasing power.

In the U.S., almost 1 out of 2 families expect to see their inflation-adjusted income decline next year.

Unsurprisingly, U.S. consumer sentiment collapsed to a 10-year-low in November, as Americans grew increasingly worried about rising prices and the inflationary impact on their wealth, according to the University of Michigan’s preliminary sentiment index.

“One in four consumers cited inflationary reductions in their living standards in November, with lower-income and older consumers voicing the greatest impact,” Richard Curtin, director of the survey, said.

That’s why there is little doubt that the possible resurgence of the pandemic with the omicron variant has been met with a mixture of emotion and worries, mainly coming from dashed hopes that the pandemic would end soon.

As a consequence, the changing consumer sentiment could add up to the difficulties the global economy is now having. And this sentiment could end up bleeding into the market, potentially causing more fear-based sell-off and alter the way investors view their portfolio.

What the Omicron variant could mean for gold

It seems that, amid all the chaos caused by omicron, the gold price continued to react to its “traditional” drivers like the U.S. inflation data and dynamics in the U.S. dollar.

And if markets keep reaching new all-time highs in a strange disconnect from what consumers and analysts feel, the global economic sentiment seems to be increasingly fearful and doubtful.

As for gold, "The prospect of slowing economic growth and persistent inflationary pressure could see the ‘stagflation’ debate regain traction. Gold could benefit from this economic backdrop," said DailyFX analyst Warren Venketas.

But the yellow metal also seems to be tied to the omicron data, with some analysts saying that the gold price could move higher if worries about Omicron continued.

This would make sense as gold has historically performed well in times of high inflation and economic uncertainty.

So until we know more about this new variant and its possible implication for our economies, and before markets enter into more potential knee-jerk reactions to new omicron news, investors might be right to secure their savings and investment by adding gold to their portfolio.


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