Theglobaleconomy
Acquired
immunity?
L
ate novemberalmost began to feel like
the early days of the pandemic all over
again. Global stockmarkets fell as news of
what would come to be known as the Omi
cron variant filtered out and investors
feared either another round of restrictions,
or that people would shut themselves
away. Two months on, Omicron’s impact is
slowly coming into focus. So far it is, large
ly, better than feared. Markets are skittish,
but because of the prospect of higher inter
est rates, rather than covid19. Goldman
Sachs, a bank, has constructed a share
price index of European firms, such as air
lines and hotels, that thrive when people
are able and willing to be in public spaces.
The index, a proxy for anxiety about the vi
rus, has surged relative to wider stock
markets in recent weeks.
Highfrequency economic data back up
the cautious optimism. Nicolas Woloszko
of the oecd, a richcountry thinktank,
produces a weekly gdp index for 46 mid
dle and highincome economies, using
data from Googlesearch activity on every
thing from housing and jobs to economic
uncertainty. Adapting his index, which has
been a good predictor of the official num
bers, we estimate that gdp across these
countries is about 2.5% below its prepan
demic trend (see chart 1). That is a little
worse than in November, when gdpwas
1.6% below trend, but better than a year
ago, when output was nearly 5% below it.
A few factors explain why the worst
fears about the variant’s economic effects
S AN FRANCISCO
How Omicron is affecting the
economic recovery
62 Finance&economics TheEconomistJanuary29th 2022
The tightness of commodity markets
makes prices alltoosensitive to war talk.
During the global financial crisis of 2007
09 both global industrial production and
commodity prices plunged in tandem,
notes Macquarie, another bank. The pan
demic, by contrast, has been accompanied
by a surge in both manufacturing output
and rawmaterial prices. Unexpectedly ro
bust demand and supplychain disrup
tions fuelled a 20% rise in the broad
Bloomberg Commodities Index in 2021.
The prices of a dozen of its elements, from
cobalt and coffee to cotton and coal, shot
up by even more.
Oil demand is roaring back towards pre
pandemic levels, even as supply has been
slow to rise. Many members of the Organi
sation of the Petroleum Exporting Coun
tries and its allies (which include Russia)
are struggling to meet their quotas for in
creased production, because of under
investment and covidrelated complica
tions. America’s shale firms have disco
vered capital discipline, favouring investor
returns over drilling. The result is that glo
bal spare production capacity is falling to
precariously low levels. Spare capacity for
many metals, too, is limited.
If war breaks out, the oil price could rise
to $120 a barrel, reckons Natasha Kaneva,
head of commodities strategy at JPMorgan
Chase, a bank. Ross Strachan of cru, a con
sultancy, says aluminium prices could rise
to alltime highs. The precedent for the im
pact of geopolitical tensions on prices is
not exactly heartening. When America im
posed sanctions on Rusal, Russia’s largest
aluminium producer, in 2018, prices of the
metal were turbocharged.
Russia and Ukraine together export
about 29% of the world’s wheat, and a big
chunk of Ukrainian cultivation takes place
in the regions that are most exposed to in
vasion. Carlos Mera of Rabobank, a Dutch
firm, says withdrawing such volumes from
the market would have an “extraordinary”
impact, because the demand for wheat is
so inelastic. Prices could easily double, he
reckons. That would trigger a struggle to
secure supplies, especially among the
largeimportersofnorthernAfricaandthe
MiddleEast.
Somecountries,suchasChinaandIran,
mightbypassWesternsanctionsandbuy
Russianmetalsandgrainsatdiscounted
rates.Thatcouldinprincipleofferreliefby
satisfyingsomedemand.ButChinaand
Iran together imported 17m tonnes of
wheatlastyear,hardlya matchforRussian
andUkrainianexportsof59mtonnes.Fall
inggrainstocksinAmerica andEurope
andbadweatherinSouthAmericathreat
entostarvethemarketfurther,saysGeor
dieWilkesofSucdenFinancial,a broker.
Moreover,Russiaisa bigproducerofurea
andpotash,importantingredientsforfer
tilisers. An export embargo would give
grain prices a further legup.
For as long as tensions stay high, the
pivotal role of energy in the economy
means price rises will spill over to other
markets, even if sanctions are not ulti
mately deployed. Expensive power has al
ready caused some aluminium smelters to
close in Europe. A surge in gas prices could
cause more furnaces to shut down. It could
also hit fertiliser production on the conti
nent—for which gas is used as both raw
material and fuel—hampering the next
growing season.
If the tensions are resolved altogether,
then it might be possible to imagine mar
kets cooling off. Europe endured a natural
gas price shock last year, but a warm winter
means that “a lot of angst has been taken
out of the market, even though we still re
main at very elevated price levels”, says
Saad Rahim of Trafigura, a trading firm. But
the tightness of supply means that prices
will cool off only a bit. Ms Kaneva reckons
that the risks with oil are asymmetric. If
peace prevails, the oil price would merely
drop to $84 per barrel. But if war breaks
out, “everything just goes up massively”.n
War-wary
Source:RefinitivDatastream *DutchTTFspot price
2
90
85
80
75
January 2022
2617101
Brentcrudeoil
price,$ perbarrel
100
90
80
70
60
January 2022
2617101
Natural gas*,
€ per megawatt hour
Caught in the crossfire