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Omicron

This detailed piece is an attempt to understand the risks posed by the new SARS-CoV-2 B.1.1.529 variant “OMICRON”. The publication discusses the risks posed by the pandemic discussing economic concepts and refreshes some of the concepts covered through time on The middle Road, a thought leader platform. The read focuses on inflationary concerns facing the world today, vaccine inequality, and social unrest within the global ecosystem due to the ongoing pandemic.

On 27 November 2021 WHO classified the SARS-CoV-2 B.1.1.529 as a variant of concern. Named Omicron,  first observed in South Africa, this variant has many properties that define a red shock for humanity. According to the very dependable Dr. Maria Van Kerkhove, COVID-19 Technical Lead, WHO Health Emergencies Program many studies are being carried out on this mutant but not much information is known until now. Dr. Maria elaborated further how once a variant is classified as a variant of concern, better surveillance around the world along with better genomic sequencing is deployed. Based on the research available, OMICRON has an increased risk of reinfection compared to other variants of concern. Within a short period, since it was first detected from a specimen on 9 November 2021 in South Africa, the virus has caused alarm among health officials to immediately take preventive steps looking at high transmissibility associated with this virus.

Why is Omicron Dangerous?
Omicron has 32 mutations in its spike protein compared to 10 for the Delta variant. Omicron has 10 mutations in the receptor-binding domain compared to 2 or 3 for other SARS SARS-CoV-2 variants. Dr. Sam Fazeli- Bloomberg Intelligence

Omicron has already spread around the world and is highly transmissible.

Dr. Angelique Coetzee, Chair, South African Medical Association, the doctor discovered Omicron variant suggested in her interview with The Telegraph that the UK is panicking unnecessarily. The ongoing research over the next two weeks will shed a better light on the dangers of this variant of COVID-19. Latest from WHO mentions its not clear if Omicron is more transmissible or the severity of disease is more compared to the Delta variant. 

The first case of Omicron is already detected in Europe which is reeling under a resurgence of COVID-19 cases. Austria has a national lockdown and France has approved booster dose for its citizens. As of today, the total Global COVID-19 cases have crossed 261 million with the US more than 49 million followed by India with cumulative recorded COVID-19 cases more than 34 million and Brazil over 22 million. In Europe, the UK leads with more than 10 million cases followed by Russia, Turkey, and France. Violent protests surged globally against compulsory vaccinations showcasing the growing rift within civic societies in addressing the pandemic.

# Vaccine Inequality 

54% of the world population has received at least one dose of a COVID-19 vaccine.  7.88 billion doses have been administered globally, and 28.95 million are now administered each day. Only 5.7% of people in low-income countries have received at least one dose. “ 

Our World in Data 28 November 2021 

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To date, China has administered more than 2.33 billion doses and India crossed 1.21 doses, the top two globally in terms of total jabs of COVID-19 noting they are also the two most populous nations in the world. As many countries advance beyond 60 percent of fully vaccinating their population, the situation ranks in strong contrast to the woeful 4 percent fully vaccination rate in Africa based on IMF research. Vaccine Inequality is today one of the most discussed issues with vibrant activism for just vaccination among low income countries.

Our World in Data | Share of people vaccinated against COVID-19

# Social Unrest

Compulsory vaccination and other proactive and positive steps by governments to impede spread of the pandemic has met with stiff opposition especially in Europe. These steps have divided civic society on fundamental human rights on pathways of policymaking. Vaccination avoids the negative externalities associated with COVID-19 and many policies are taxation of measures negative externalities. Refer to Online Microeconomics tutorials on The middle Road. 

# Inflation

The middle Road is one of the foremost thought leader platforms to publish research focused analysis on policy rates using Taylor’s and Mankiw rule as a benchmark.

Disruption to supply chains has led to an increase in the cost of goods leading to an increase in expectation of inflation. The middle Road is one of the foremost thought leader platforms to point that inflation will be a cause of concern, central banks need to taper their purchases and increase rates. There is a series on Macroeconomics on this subject matter, kindly register and learn through educational videos about this topic. Inflation can be categorized as demand or cost-push inflation.

                                                                                       Fig a  Cost Push Inflation | The middle Road

Demand-Pull inflation is the result of factors that affect Aggregate Demand within an economy while Cost-Push Inflation is due to factors that impact the Aggregate Supply of an economy. Wage growth, increase in energy, food, or any factor that increases the cost of goods are examples of Cost-Push Inflation. In the figure a, an increase in the cost of raw materials due to supply disruptions causes the short-run aggregate supply curve (SRAS) to shift leftwards shooting the price level upwards from p1 to p2. In the long run, the aggregate supply curve is vertical i.e. it is fixed. Policy measures through either expansionary fiscal or monetary policy to increase the aggregate demand to point c leads to further increase in the price level. Many central banks target inflation so more likely than not, a monetary contraction by increasing interest rates will lead to a contraction in Aggregate Demand and GDP. Situations of high inflation and declining real GDP are known as Stagflation. Omicron spread may lead to extended periods of shutdowns within our economy fueling higher expectation of inflation and declining GDP. Depending on longevity in containing this strain of novel SARS, its potency, and transmissibility, the dangers from this new strain will be better known in two weeks when the data about the virus is better known. High oil prices further exacerbate the situation leading to real risk of stagflation especially with emergence of Omicron that will lead to temporary lockdowns and its impact on businesses will be felt if it turns out to be more severe and transmissible than the Delta variant. 

Remember in the long run, aggregate supply depends on the increase in the supply of labor and physical and stock, quality of manpower, supply of natural resources, and level of technology. Data for a highly digitalized economy is another factor while equitable education as proposed by The middle Road both an enabler and a factor for increasing productivity in the long run. In the very short run, prices are sticky and the aggregate supply curve is horizontal. Refer to Macroeconomic courses on The middle Road.

Read Pandemic – Understanding Macroeconomics for Social Impact

 

In the chart, compares inflation rate between comparable economies herein Turkey is part of OECD, inflation rate is compared to economies within OECD Europe.

Chart The middle Road | Source OECD (2021), Inflation (CPI) (indicator). doi: 10.1787/eee82e6e-en (Accessed on 28 November 2021). The chart depicts quarterly annual percent increase for selected countries. The inflation includes food and energy prices measured by consumer price index (CPI). CPI is defined as the change in the prices of a basket of goods and services that are typically purchased by specific groups of households. 2015 IS THE BASE YEAR. aRGENTINA’S INFLATION NUMBERS STAND AT 51.9%.

 

 

Chart: 10-Year 0.125% Treasury Inflation-Indexed Bond, Due 01/15/2030

cHART: Haver Analytics and Dow Jones & Company, 10-Year 0.125% Treasury Inflation-Indexed Bond, Due 01/15/2030 [DTP10J30], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTP10J30, November 29, 2021. | Units:  Percent, Not Seasonally Adjusted

TIPS were first issued by the U.S. Department of Treasuries on January 29, 1997, for the first time with coupon rate as the real rate that investors earn above inflation. TIPS is the most popular form of Treasury inflation-indexed securities (TIIS). TIIS are a good indication of investors future rate of inflation measured as the yield spread between TIIS and that of a comparable on the run nominal treasury security. Inflation indexed securities are used to derive market-based inflation expectations. Breakeven rates are used to derive the discount rate on nominal interest rates that equates it to real interest rates.

Jonathan Church of U.S. Bureau of Labor Statistics published Market-Based Inflation Expectations and Inflation Realities: A Comparison of the Treasury Breakeven Inflation (TBI) Rate Curve and the Consumer Price Index before, during, and after the Great Recession to understand efficacy of TIPS breakeven rates, specifically calculated by the Treasury Breakeven Inflation (TBI) Rate Curve, as a measure of market-based inflation expectations. U.S. Treasury Breakeven Inflation Rate Curve, a unique measure of market-based inflation expectations that computes monthly breakeven inflation rates for short and long-term maturity horizons in 6-month increments, to the U.S. Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers, U.S. City Average, All Items, in the 175 months from July 2003 to January 2018. Therefore, TBI breakeven rate is the expected annualized rate of inflation calculated from real and nominal spot rates and a positive inflation risk premium lowers real yield on TIPS. TIPS have higher liquidity risk compared to nominal treasury security. 

Nominal Interest Rates = Real Interested Rates + Expected Inflation

I= R + inflation premium = (1+R) (1+ inflation premium) -1 

The inflation adjusted principal is adjusted semiannually based on the prevalent index ratio (ratio of the reference CPI for the settlement date to the CPI on the issue date) and a fixed coupon paid on the adjusted principal. To know more about bonds register on The middle Road and access Fixed Income under Valuation – Online Courses.  In the FED Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Inflation-Indexed, the yields are negative as either market is expecting the inflation to rise hence negative real yields or buying due to flight to safety.  The prolonged negative yield points to the first note all else constant. 

Turkey should look at increasing interest rates to arrest its currency depreciation considering it follows a very accommodative policy looking at high inflation. It has a moderate national debt to GDP at 37.7 percent based on the data shared by Statista. It can reduce taxes, increase government purchases, hand out cash handouts to its population to enhance consumption. Turkey has low budget deficit of 1.6 percent of GDP in the first half of this year, a rising but manageable debt to GDP ratio, with non-performing loans at 3.7 percent of GDP, Turkey has lot of flexibility of increasing government purchases as a means to boost growth within the economy. An increase in policy rates will help to stem the fall of Turkish Lira.  

The nominal spot rate TRY to EUR is at 0.070716 but the real exchange rate is 0.061706 that takes the CPI in EUR and TRY. TRY is Turkish Lira. The real exchange rate is a good measure to understand relative purchasing power between two regions. A persistent weakening currency with relatively high inflation compared to other economies erodes the purchasing power of the domestic country. A weak currency makes the import of goods more expensive, further driving higher inflation. The idea to weaken a domestic currency to increase exports that initially worsens trade deficit before rebounding on the back of increased exports known as J Curve effect does not always work. Also known as J Curve, this has not worked for many countries. High inflation is bad and a higher expected inflation mother of all evil’s says Jeeves. More in detail at a later date. Note CPI for EU =4.1 percent, Turkey 19.3 percent. 

# Right Now

One key measure would be to enforce strict travel restrictions significantly during times of uncertainty. A brief two-week period travel restriction implemented by Israel would be a judicious step at this point. History has shown that countries that implemented strict lockdowns and travel restrictions earlier during the pandemic fared much better than those that did not. The middle Road published a detailed report on the pandemic aspect sometime back.

 

References 

  • WHO
  • Covid: UK is ‘panicking unnecessarily’ says doctor who discovered Omicron variant- The telegraph YouTube Video
  • Dr. Sam Fazeli- Bloomberg Intelligence
  • https://www.xe.com/currencycharts
  • World Bank Turkey
  • Statista
  • Our World in Data
  • OECD

Recommended Read: Inflation expectations and inflation realities: a comparison of the Treasury Breakeven Inflation curve and the Consumer Price Index before, during, and after the Great Recession

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