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January 07, 2022 | 12:27
Omicron-omics 101
Economics
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Fixed Income Strategy
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Economics
Omicron-omics 101 |
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The highly contagious Omicron variant is causing COVID-19 infections to skyrocket on both sides of the Canada-U.S. border, trajectories that are already having negative economic consequences. Below, we put these consequences and their likely continued accumulation during the days and weeks ahead into some context. |
For the week ended January 6, reported new daily cases averaged around 41,000 in Canada, sitting more than five times above the previous twin peaks in January and April of last year (Chart 1). New daily U.S. infections averaged around 592,000, more than double the pandemic’s previous peak in January 2021. (Note that testing was not as readily available in prior episodes, exaggerating these comparisons.) Although it’s uncertain when reported case trends might crest (it could already be occurring in Canada owing to the ‘circuit-breaker’ effect of increased restrictions), actual infection rates are higher. Many jurisdictions are hitting their testing limits and self-administered rapid test results are typically not included in official figures. Once again, the key concern for authorities is the present and potential strains on health care systems. Compared to previous variants, Omicron seems to result in lower incidences of severe illness necessitating hospitalization, partly or entirely thanks to vaccines and natural immunity. But it also appears to be much more transmissible, including among the vaccinated, causing a tsunami of ‘mild’ cases. Nevertheless, the sheer volume of new cases is still causing the number of hospitalizations to head sharply higher on both sides of the border (Chart 2). Canada has already surpassed its prior peak and the U.S. is fast approaching its own. It’s also uncertain when these might crest. (These data do not disaggregate between admissions due to COVID and those owing to other reasons but also turn out to have the virus, something health authorities are very interested in as they assess the severity of Omicron.) |
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In response to Omicron, provincial governments have been increasingly re-introducing restrictions such as limiting customer capacities and requiring some businesses to close, with commensurate negative impacts on Canadian economic performance. The ultimate impact will depend on whether restrictions are increased from current levels and how long they last. As an example, the multi-month run of onerous restrictions surrounding the wave peak in April 2021 contributed to real GDP contracting a combined 1.5% in April and May and for the entire quarter (-3.2% annualized). |
Meanwhile, despite relatively higher and also surging rates of COVID-19 infections and hospitalizations south of the border, most state and local governments have not re-introduced restrictions. However, we wouldn’t be surprised if some states or cities did so in at least a minor manner, particularly those jurisdictions with higher population and urban densities. Nevertheless, even in the absence of major restrictions, the U.S. economy is still being impacted by Omicron in other ways, and so too is the Canadian economy. As last summer started, essentially all meaningful restrictions had been lifted across America. Amid the pandemic wave that peaked in September, some consumers responded by imposing self-restrictions; for example, by opting not to dine out or fly. Reservations through OpenTable’s platform slipped through the late summer and early autumn (Chart 3). And, a similar ebbing pattern is evident in the TSA’s passenger traffic figures (Chart 4). In turn (and alongside reduced UI benefits), real consumer spending on food services and accommodations contracted in both August and October, with growth in outlays on transportation services grinding to a halt by November. In the wake of Omicron and after the holidays, there are early indications of renewed self-restrictions. Meanwhile, the massive wave of ‘mild’ Omicron cases is creating another potential major problem for the Canadian and U.S. economies: absenteeism. Employees are increasingly not showing up for work because they have contracted Omicron, or have been in close contact with someone who was infected, and are now quarantining. For example, both Canadian and U.S. airlines are already plagued by pared availability of full flight crews, resulting in significant cancellations. |
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The shorter five-day quarantine period now recommended by the CDC and several provinces for non-symptomatic cases (and no quarantining for those exposed to an infected person but who are fully vaccinated and non-symptomatic) should shorten these specific absences. However, the sheer volume of new infections (lots of at least five-day absences) and a commensurate increase in symptomatic persons (with their longer quarantines) will likely lead to more widespread labour availability issues in the days and weeks ahead. |
This comes at a time when businesses are already struggling to hire and retain employees. The CFIB’s share of respondents reporting labour shortages as a limiting factor to growth is near all-time highs, as is the share of respondents to the NFIB’s small business survey reporting few or no qualified applicants for job openings (Chart 5). Apart from record or near-record high job openings on both sides of the border, U.S. businesses are also contending with record-high quits rates (we suspect Canadian firms are facing elevated levels as well). Now, worker absences will be adding to this production-restraining mix. Elsewhere, the rebound in the U.S. participation rate will probably be constrained by Omicron’s surge (Chart 6). Apart from increased early retirements and other factors, the lacklustre recovery in the part rate reflects prior employed or unemployed persons dropping out of the labour force because of the pandemic, with reasons such as childcare issues or health and safety concerns often cited. In December, some 1.1 million persons were in this camp, accounting for around 30% of the ‘missing’ labour force. Although this number has been trending down since it was first reported in May 2020 (at 9.7 million), recent waves of the virus have either temporarily reversed the downtrend or caused it to stall. On balance, the tsunami of Omicron cases is going to at least temporarily exacerbate lingering supply bottlenecks. In the Minutes from the December 14-15 FOMC meeting (released this week), participants noted that “more prolonged global supply-side frictions, which could be exacerbated by the emergence of the Omicron variant” posed downside risk to economic activity and upside risk to inflation. COVID cases are now 4½ times higher than at the time of the meeting, suggesting both risks have risen profoundly in the Fed’s eyes. The extent to which these risks are realized will depend on how long new Omicron infections remain elevated and whether this highly contagious virus spreads to other critical regions in global supply chains. |
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Omicron’s negative economic effects—restrictions, virus-related absenteeism, exacerbated labour shortages and other supply bottlenecks—form a huge headwind for the Canadian and U.S. economies. We’re not expecting much growth on either side of the border to start the year (Q1) with 1.5% annualized in the U.S. and a flat reading for Canada (with the net risk of another negative result). Canadian GDP is now expected to recover all the ground lost during the recession by Q2, a full year after the U.S. did so. However, for both economies, the common sectors most negatively impacted by the onset of the pandemic and its subsequent waves have been (1) accommodation and food services, (2) arts, entertainment and recreation, (3) other (personal) services, and (4) transportation and warehousing (only the former). And, these industries are still among the most vulnerable to the latest virus wave. Tack on an extended ‘K-shaped’ recovery/expansion to the list of Omicron’s economic effects. |