Markets have got it about right on Omicron so far

Amateur virology is all the rage in the City. Analysts who would normally be more at home inputting some seasonally adjusted labour market data into a spreadsheet now find they can’t explain what is likely to happen to the economy without understanding how viruses spread.

When news emerged of the Omicron variant of Covid-19 last week it was the signal for financial markets everywhere to take a tumble. That was an entirely rational response: stock markets were not prepared for a potentially dangerous new strain of the virus and the sensible thing to do was to mark down share prices.

Over the weekend the sense has grown that things might not turn out so bad after all, so share prices have regained a bit of the ground they lost on Friday. The prospect of central banks delaying action to combat rising inflation probably helped sentiment a bit.

The fact is, of course, that nobody knows for sure what sort of threat Omicron poses. Scientists are saying it will take a couple of weeks before there is enough data to make informed judgments, which means for now all commentary is glorified guesswork.

Here’s what we know. Omicron has arrived at just about the worst possible time for countries in Europe and North America because cold weather means people make themselves more susceptible to catching the virus as they spend more time indoors. If Omicron is as easily transmissible as epidemiologists fear, then that’s a worry.

What we also know is that the big developed countries were slowing down even before news of Omicron surfaced. Some amateur psychology would suggest consumers will spend less in the shops this Christmas and be more reluctant to go out for meals. Businesses will put investment plans on hold. It doesn’t take a full officially mandated lockdown to influence behaviour and some sectors of the economy – hospitality, travel, airlines – will suffer more than others.

The final thing we know is that economies have got used to dealing with the disruption caused by the pandemic. Even if vaccines are less effective against the new strain – and there is no evidence that is the case – the impact on activity will be moderated by working from home and shopping remotely.

In short, the markets have probably got their judgment about right. Omicron currently looks more like an economic setback than a calamity. But that’s only a hunch.

Reports of the end of the UK’s residential property boom are exaggerated even though latest figures from the Bank of England show mortgage approvals at their weakest since before the stamp duty holiday began in the summer of 2020.

Demand for home loans always tails off as the nights draw in, and this year there was the additional factor of Rishi Sunak’s tax break coming to an end in September. Buyers brought forward transactions to beat the chancellor’s deadline, yet, even so, the number of approvals simply returned to the average for 2019, the year before the pandemic.

Cheap borrowing costs are the main reason activity in the housing market continues to be strong. To be sure, some of the more tempting offers to homebuyers have been withdrawn by lenders in anticipation of higher interest rates from the Bank of England but mortgage rates are still extremely low by historic standards.

Moreover, the supply of new homes has not recovered to pre-pandemic levels despite soaring demand. As Andrew Wishart of Capital Economics pointed out, traditionally new-builds have averaged 13% of housing transactions but that figure dropped to 9% in the first half of 2021. Shortages of labour and materials mean supply will remain constrained, and with demand strong there can only be one result: house prices will continue to rise.

Incentives matter, so when the Treasury announced its “eat out to help out” scheme in August 2020 the UK public responded to the offer of cut-price food and drink. But did the financial inducement also make people more likely to take more risks than they otherwise would?

The answer from Sweden suggests that it might. Marco Islam of Lund University carried out an experiment during the pandemic in which participants were given vouchers for use at cafes worth either €1.50 (£1.27) or €10.

Unsurprisingly, both groups were more likely to go out for a flat white after receiving the voucher but those receiving €10 also convinced themselves that a visit to a cafe was less risky than they had previously thought even though infection rates were rising. Food for thought there, perhaps.

Comments are closed.