Code red Omicron scenario would setback UK economic recovery, warn experts

The UK economy would suffer a severe setback in its battle to revert to pre-pandemic strength if the Omicron variant proves to be deadly, City economists have warned.

If the heavily mutated strain of the virus is capable of evading vaccines and the UK government reimposes blanket lockdown measures, the economy would shrink back to around six per cent below its pre-crisis size.

That’s according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics, who set out in a research note the potential severity of the hit to the British economy if a code-red Omicron scenario emerges.

Analysts at Wall Street giant Goldman Sachs agreed with Tombs’s assessment.

In a worst case scenario, in which Omicron poses severe health risks, “growth is significantly lower… given more intense hospital pressures, severe restrictions, and consumer fear,” the investment bank said.

Fear of catching a more deadly strain of the virus would weigh heavily on consumer spending as Brits stay hunkered down in their homes.

A sharp reduction in spending would hit Britain’s economy hard due to its reliance on services businesses – which make up around 80 per cent of total output – to generate growth.

Paul Dales, chief UK economist at Capital Economics, said: “Fear of catching Omicron may restrain activity if people cut back on socialising.”

In a throwback to the “pingdemic” last July, the spread of Omicron could force large swathes of the UK public to isolate, meaning “they would be less able to spend and work,” Dales added.

The potential impact of the new variant on inflation is difficult to judge. A reimposition of blanket lockdowns will hit both supply and demand equally, meaning inflation would likely trend in the same upward direction it is currently on.

Upside risks to inflation are more likely in a best or worst case scenario, meaning the Bank of England is unlikely to be deterred from hiking rates next month.

Experts stressed the importance of waiting until further information on the variant emerges before making any economic bets.

“We are not making Omicron-related changes to our forecasts until the likelihood of these scenarios has become somewhat clearer,” Goldmans Sachs said.