The Omikron variant unsettles the economy and consumers.
(Photo: dpa)
London The UK economy appears to be in good health. In the three months to November, the number of vacancies rose to more than 1.2 million – a new record. According to the national statistics agency ONS, the unemployment rate fell to 4.2 percent in the three months to October.
The fear that unemployment would skyrocket after the expiry of the short-time working regime at the end of September has not come true. The number of layoffs is below the average of the pre-Corona period. British companies created 257,000 new jobs in November alone.
So it seems only a matter of time before the Bank of England initiates a turnaround in interest rates. The British central bank had so far waited to see how the end of corona aid would affect the labor market.
Omicron uncertainty delays rate hike
“All indicators look pretty rosy. There are conditions for the Bank of England to raise interest rates, ”says Steffan Ball, economist at the US bank Goldman Sachs in London.
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The key interest rate is currently 0.1 percent. For months now, economists have been predicting an initial increase to 0.25 percent soon. The Bank of England would thus be the first major central bank to pull the lever again after the phase of low interest rates.
However, there is now a new factor that is making central bankers hesitate: The rapid spread of the omicron variant of the coronavirus brings further economic uncertainty with it. Most economists therefore expect the Bank of England to postpone the rate hike again at its meeting this week. “Without Omikron, they would increase this week,” says Ball. “Now they’ll wait until February.”
The labor market figures indicate a robust upswing, but the high number of vacancies also underscores the central problem faced by many British companies: a number of industries are complaining of acute labor shortages. This is partly due to the pandemic because employees have switched to crisis-proof industries and avoid other industries such as the catering trade.
Brexit exacerbates labor shortages
But Brexit also plays a role. Hundreds of thousands of EU workers have left the UK in recent years. And since leaving the single market at the beginning of the year, British companies can no longer hire EU workers without a visa. This exacerbates the bottlenecks on the labor market, especially in the food industry, logistics and catering.
As a result, wages rise. According to the ONS, they increased by 4.3 percent in the three months to October. If you include the special payments, the increase in wages was as much as 4.9 percent. This is driving inflation – as well as rising energy prices and high import costs for materials due to global supply bottlenecks. The rate of price increase is currently 4.2 percent. Economists expect it to rise to more than five percent in the first quarter.
So the pressure on the central bank to raise interest rates remains. Much depends on how strong the omicron effect will be on the economy in the coming weeks.
Omicron effect so far manageable
The mutant is currently spreading rapidly, the British health authority is assuming 200,000 new infections per day. A double vaccination does not seem to be sufficient against the infection, but most of the disease courses have so far been mild.
Therefore, the British government has not yet imposed a lockdown, but only decided on individual measures such as mask requirements, 3G rule for major events and home office announcements.
These restrictions have a manageable impact on economic life. Working from home is no less productive, only the retail trade in the city centers suffers. Goldman-Sachs economist Ball has therefore only revised down its growth forecasts for the fourth and first quarters slightly by a total of 0.5 percentage points.
The analysts at the investment bank RBC Capital Markets do not see Omikron as a “game changer” either. The new restrictions delayed the upswing by perhaps a quarter, but they did not create a “totally new situation”, they write in a paper.
If the Omikron effect remains mild, as expected, the Bank of England is likely to raise interest rates in February. Two more rate hikes could follow by the end of the year. Economists assume that the key interest rate will be between 0.75 and one percent by the end of 2022.
More: Boris Johnson relies on booster vaccinations against the Omicron wave