Winter blues: how much damage could Omicron do to the UK economy?

Bank of England and Royal Exchange in the City of London

The ‘slowdown’ in an empty City of London

(Image credit: Tolga Akmen/AFP via Getty Images)

last updated 17 December 2021

“We’ve always acknowledged there could be bumps on our road to recovery,” observed the Chancellor, Rishi Sunak, last week. Omicron looks like a sizeable one, said Simon Duke in The Times. Before the variant struck, it seemed “all but certain” that the Bank of England would this week lift borrowing costs from a historic low of 0.1% to tackle rising prices. Indeed, ahead of the decision to increase the interest rate to 0.25%, some economists were still arguing that a raise would send the important message that policymakers are serious about tackling inflation, which jumped to a ten-year high of 5.1% in November. For most, however, “the pendulum has swung decisively in the other direction”. There are now real fears that the economy will contract, said Maike Currie of Fidelity on Sky News. “The BoE will be acutely aware that it’s harder to dig an economy out of recession than to cool rising inflation.”

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In fact, “Britain’s economic recovery had come close to stalling”, even before the onset of the new variant, said Larry Elliott in The Guardian. ONS figures show that in October – the first month after the end of the furlough scheme – output grew by just 0.1%, with signs of “a sharp drop-off in visits to restaurants, pubs and bars”. They have now been whacked even further by the tougher Plan B curbs. “Of the three main sectors of the economy, only services expanded in October.” Manufacturing fell by 0.6%, and construction by 1.8% – “the steepest fall since April 2020”. The effect of Omicron on inflation is “unclear”, said the FT. But the variant is certainly “likely to soften growth” – spreading the slowdown to the services sector, especially after the changed guidance on working from home. “Monetary easing, at this point, can do little to help. Fiscal policy – government spending – is the right way to support the economy.”

“The Treasury will hate the idea of another furlough, let alone more bounceback loans and support for the self-employed,” said James Moore in The Independent. But if the pandemic worsens, it may be the only way to save legions of businesses in hard-hit sectors which have only just emerged from “hibernation”. The last lockdown borrowing bill was huge, but it was “good borrowing”, which “facilitated a faster recovery”. The new restrictions “are not the main cause of the pain now being felt in the economy”, said Jeremy Warner in The Daily Telegraph. “Rather, it is the gathering sense of public panic.” As things stand, it’s unclear whether there’s “justification for another round of business support”. Indeed, “I’m willing to bet” that, three months on, the chief worry will not be the necessity for another furlough, but big “inflationary pressures”.