So here we are again. Christmas is approaching and a new variant of Covid-19 has appeared. Infections are on the rise but the government is worried about overreacting. There are risks to public health from people socialising but risks to the economy if they don’t. Being an armchair critic is easy but getting the balance right is hard.
A couple of weeks ago it all looked different. Certainly, the number of UK cases remained stubbornly high but the UK was not suffering the surge in cases seen in Austria, Germany or the Netherlands. The arrival of vaccines – the big change in the past 12 months – meant hospitalisations and death rates were much lower than they were when the country was locked down last winter.
Meanwhile, the economy was chugging along. The end of the furlough had passed off without the feared wave of redundancies and things were looking up for both the manufacturing and services sectors. Industry was reporting the strongest order books since the late 1970s, while the loosening of travel restrictions meant the service sector saw the biggest upturn in overseas business in four years.
Growing inflationary pressure caused by supply-side bottlenecks posed the biggest barrier to rising output, and the City was convinced the Bank of England’s monetary policy committee would raise interest rates at its December meeting.
Then Omicron arrived and everything was made a lot more complicated.
For a start, the new strain of the virus is already having an impact on the economy. People are working from home more and they are going out less. In a milder form of the behavioural pattern seen during lockdowns, people will spend money that would have gone on services on goods instead. There will be fewer visits to cinemas but sales of new TVs will go up.
It was this shift that created global bottlenecks, because supply couldn’t keep up with demand. Until a couple of weeks ago, consumers and businesses were starting to sense the end was in sight: that once the Delta variant had been seen off, life could return to normal. That idea has now been nixed, because even if Omicron proves to be less of a problem than feared, there will be more Greek letters to come, one of which could be a super-variant. What were originally considered to be temporary behavioural changes could become more embedded. Inflationary pressures seen as transitory could become more permanent.
For the Bank of England, as for other central banks, this presents a dilemma. The MPC delayed raising rates last month because it wanted to see the impact on unemployment of ending the furlough. Should it again adopt a wait-and-see approach until there is more clarity on how serious Omicron will be for the economy, or does that run the risk that tougher action will be needed in the future? Michael Saunders, one of the two MPC members who voted for a rate rise in November, put both sides of the argument in a speech last week.
Judging by his recent remarks, Threadneedle Street’s former boss, Lord King, would have no hesitation in voting for a rate rise were he still governor. Speaking recently, King said central banks had adopted a King Canute-like approach in which inflation would stay low because they said it would.
When he was governor, Mervyn King coined an acronym for the state of the economy: Nice. It stood for non-inflationary continual expansion and summed up the seemingly benign state of the world as it was in the early years of the 21st century.
The Nice times were never quite as good as they looked, but even so, things were a lot simpler back then. Economies grew steadily year after year, inflation remained low and central banks contented themselves with tweaking interest rates every now and again.
There is nothing central banks would like more than to return to the era of the Great Moderation of the late 1990s and early 2000s. But those days are over, if not for ever then for a long time to come.
If the stakes are high for the Bank of England, then they are even higher for Boris Johnson and Rishi Sunak. The prime minister and the chancellor have their differences but they are agreed that the UK has to learn to live with Covid, and that vaccines make that adaptation easier. Since the late summer, the Treasury has been acting as if the crisis is all but over: ending support schemes such as the furlough and switching its focus to reducing the budget deficit.
Early signs from the labour market have been encouraging. Unemployment has not shot up and vacancies are plentiful. People wanted to get their lives back after more than a year of severe curbs on their personal liberty and flocked back to reopened pubs, restaurants, hotels, theatres and cinemas. Business was brisk in the sectors hardest hit by government restrictions.
As with the Bank of England, the government faces a dilemma but one with potentially much more serious consequences. Would it be better to adopt a no-risk approach to Omicron by bringing in more stringent restrictions now or wait and see how things pan out?
Despite the mixed messages coming out of Westminster and Downing Street last week, the view seems to be that economic disruption should be kept to a minimum and that Christmas should not be cancelled for a second year running. A high bar has been set for imposing new restrictions.
The risk, of course, is that Omicron spreads quickly and tough curbs are eventually imposed anyway, leading to strains on both the NHS and the economy. For an already weakened government, such a double whammy would be potentially catastrophic.