Omicron Variant Threatens Economic Recovery

Nathan Tynan ‘22

A new coronavirus variant has emerged from southern Africa, threatening an already beleaguered global economy. B1.1.529, dubbed the “Omicron variant” by the World Health Organization (WHO), has led to a rash of travel restrictions, raising concerns among investors that the global recovery is under threat.

Originally detected in Botswana, the omicron variant has now spread across the world due to global travel from South Africa, with cases reported in the United Kingdom, Belgium, Israel, and other countries. While not much is presently known about the Omicron variant, it possesses an unusually high number of mutations, far exceeding that of the incredibly virulent Delta variant that caused cases to spike this summer. This, the fact that it appears to have a high potential for reinfection, and rising case counts in South Africa have led to concerns that the Omicron variant could cause a winter surge, especially as much of the developing world is unvaccinated and vaccine immunity is beginning to wane in high-income countries.

As a result, many nations have announced global travel restrictions, with the U.K., the EU, the U.S., and others restricting travel from countries in southern Africa. These restrictions have led to airline stocks plunging, coupled with a precipitous fall in oil prices. Should the variant prove to be sufficiently severe and virulent, travel restrictions will likely expand as the variant infects more countries, crippling revenues for the already struggling airline and hospitality industries.

While declining oil prices may lead to some relief at the pump, consumers should not necessarily expect the Omicron variant to blunt rising prices in other sectors. Lower oil prices may reduce fuel costs for international shipping, but this could be more than compensated for by supply chain disruptions if higher case counts reduce staffing at ports or factories. This could strain an already overburdened supply chain that has been attempting to accommodate record demand, right in time for the holiday shopping season. Furthermore, restaurants and theaters may also shutter or reduce capacity, forcing consumers to return to eating in and streaming at home. This increased tendency to stay indoors could also increase demand for natural gas to heat homes, with natural gas markets being mostly unfazed by news about the novel variant.

While the impact of the variant will likely be marginal if it turns out to not be particularly severe, virulent, or vaccine resistant, investors and consumers alike should remain cautious until more information becomes available. As prices continue to rise, and the United States faces a looming debt ceiling deadline, the Omicron variant will almost exacerbate already substantial market volatility in the short term, even if it is ultimately less potent than expected. Should its many mutations allow for a resurgence of COVID, however, the global economic fallout could be much less transient and much more severe.

Sources:

https://www.wsj.com/articles/new-covid-19-travel-restrictions-rattle-airline-industry-hit-shares-11637935155

https://tradingeconomics.com/commodity/natural-gas

https://www.nytimes.com/2021/11/27/world/africa/coronavirus-omicron-africa.html

https://www.npr.org/2021/11/25/1059272133/new-covid-19-variant-in-south-africa-raises-concern