How Omicron could trigger stagflation

How Omicron could trigger stagflation. By John Stepek.

As Omicron runs rife, populations are hunkering down, stifling consumption and growth. But with politicians and central banks reluctant to spend, that raises the threat of stagflation. …

Despite vaccines, despite boosters, despite the fact that lots of us have had it (it swept our entire household in August), we’re approaching New Year 2022 with a feeling that’s horribly like New Year 2021.

Unlike almost every other journalist in the country, I’m not an epidemiologist (who knew there were so many highly-qualified people in journalism?) so I’m not going to even pretend to know if Omicron is less dangerous than all the other Greek alphabet varieties.

But if your world is anything like mine, then in the last week you’ve probably heard about more people coming down with Covid, and perhaps more importantly you know lots of people who’ve been cancelling nights out because they don’t want to risk having to sacrifice a family Christmas dinner because they popped out for a pint with their work colleagues.

So two things seem to be true: Covid cases are up again, and fear of Covid is up again. And then on top of all that, there’s the games that politicians are playing.

Politicians in many countries are trying very much to pretend that they’re not re-imposing lockdowns because no one likes the politics of it, and the people who run the budgets aren’t very happy about the idea of shelling out for more business compensation …

That’s why we’ve seen travel restrictions coming in more readily than official restrictions on going out and the like.

But with all this uncertainty, and with working from home pretty much back in place (for those who could already do it), the “velocity of people” as Helen Thomas of BlondeMoney memorably puts it, is diminishing again. …

Unlike last time this happened, politicians no longer seem keen to spend more money (so no more fiscal stimulus) while central bankers are trying to look for the exit (so no more monetary stimulus).

If all the leisure sector companies who survived the past year to come out fitter and leaner and more appealing are shut down again, but this time don’t have the support to keep their staff on or to compensate for loss of business, then you’ll get “proper” unemployment.

No wonder markets are feeling the pain this morning. “Stay at home” stocks are all very well, but only if the people who are staying at home are continuing to get paid.

So what comes next? The main variable to watch is the evolution of the virus. If it turns out to be milder than expected (which seems to be the case in South Africa, but lord knows how population age and weather interact with all that) then maybe after Christmas everyone calms down a bit.

But some damage has already been done. If we tilt any further into lockdown — and of course, we’ll now always have the spectre of new variants hanging over us — then the government will surely come under pressure to reinstate spending. But it’s hard to see it being as generous as the last time.

What you then really need — to put it bluntly — is a big market crash. That would be enough to trigger a panic response from central bankers.

So a voluntary lockdown as people dodge omicron, plus no government monetary stimulus this time, is risking a big shot of unemployment to join the current inflation.