Fears variant will amplify shortages, driving up inflation, or even force repeat of earliest phase of pandemic


An almost deserted 5th Avenue in New York in March 2020.
An almost deserted 5th Avenue in New York in March 2020. Photograph: Mike Segar/Reuter

Western governments could be forced to bring in fresh emergency financial support for businesses and households if the Omicron coronavirus variant causes a severe global slowdown, a leading economic thinktank has warned.

Sounding the alarm as more cases are identified, the Organisation for Economic Co-operation and Development (OECD) said a renewed wave in the pandemic threatened to add to the existing strain on the world economy from persistently high levels of inflation.

Should Omicron prove more transmissible than other variants or more resistant to existing vaccines, it could exacerbate disruption to already battered supply chains and risk driving up inflation for a prolonged period, the Paris-based organisation said.

If it takes a more severe turn, it could also force governments to impose tighter mobility restrictions, hurting demand for goods and services, and leading to a sharp fall in economic activity and lower inflation, similar to the earliest phase of the pandemic.

Laurence Boone, the chief economist of the OECD, said there were two scenarios facing the international economy as Omicron adds to the uncertainties in the recovery from the Covid-19 crisis.

“One is where it creates more supply disruptions and prolongs higher inflation for longer. And one where it is more severe and we have to use more mobility restrictions, in which case demand could decline and inflation could actually recede much faster than what we have here,” she said.

If the Omicron turned out to be “more evil” than other variants, Boone said, governments could be called upon to step in to cushion the blow for businesses and households. “That could be a scenario where we need more fiscal support at this stage,” she added.

Already in the UK, bosses of pubs, bars and restaurants are reporting a wave of cancellations for Christmas party bookings amid fears over the new variant, in an early sign of its harmful economic impact.

Publishing its latest economic outlook report, the OECD said the world’s recovery from previous lockdowns was continuing but that momentum had eased and was becoming increasingly imbalanced.

It added that the failure to ensure rapid and effective vaccination around the world was proving costly, with uncertainty remaining high and as new Covid variants are identified.