Independent economics researcher Capital Economics warns of potential further supply chain problems and inflationary pressures

The emergence of a new Covid variant could "complicate" the economic policy response and potentially lead to even more supply chain problems and inflationary pressures, according to a global independent economics researcher.

Neil Shearing, chief economist of Capital Economics, in an update issued at the start of the weekend (so, quite soon after the revealing of the new Omicron Covid variant - and the update is titled: 'First thoughts') makes the point that as Covid Delta has shown "it’s very hard to stop the spread of virulent new variants".

He says the moves to limit arrivals from South Africa and some other African nations "probably won’t prevent it spreading to other countries, particularly if it’s as contagious as currently feared".

The lesson from the past couple of years, Shearing says, is that it’s the restrictions that are imposed in response to the virus – rather than the virus itself – that causes the bulk of the economic damage.

"So, the key question is how governments will respond in the event that the strain spreads. That in turn will hinge on the extent to which it escapes the vaccines and, importantly, causes strains in national healthcare systems."

He thought if the new variant arrived in China would probably cause Beijing to double-down on its “zero Covid” strategy. 

"That would mean localised lockdowns as outbreaks emerge, tighter restrictions on regional travel and a greater likelihood of port shutdowns. China has proved adept at managing outbreaks, but the long-run economic costs will mount if highly-transmissible strains are endemic globally."

The global economic backdrop is "very different" now than in previous waves of the virus, Shearing says. And he points to potential inflationary pressures - and to further labour market pressures.

"Supply chains are already stretched.

"A virus-related surge in goods spending, or port closures, would exacerbate existing supply strains and add upward pressure to goods inflation.

"Likewise, a new, more dangerous, virus wave could cause some workers to temporarily exit the workforce, and deter others from returning, making current labour shortages worse."

All of this would "complicate" the policy response, Shearing says.

"At the margin, the threat of a new, more serious, variant of the virus may be a reason for central banks to postpone plans to raise interest rates until the picture becomes clearer. The key dates are 15th December, when the Fed meets, and the 16th December, when several central banks, including the BoE and ECB, meet. But unless a new wave causes widespread and significant damage to economic activity, it may not prevent some central banks from lifting interest rates next year."

He says short-term interest rate expectations in the US and several other major developed "had risen considerably" over the past two months and had "looked somewhat overdone" even before the news of the new variant.

"...And there is ample scope for a further drop in yields, especially at the short end of the curve.