Why the economic trauma caused by Omicron could have been predicted

As the New South Wales government introduced restrictions last week, a Health official claimed that nobody could have predicted the challenges created by the rise of Omicron.

But while policymakers didn’t necessarily foresee the sudden emergence of a more transmissible, less virulent strain of COVID-19, some experts say we could have been better prepared to face the economic havoc created. Instead Treasury was sidelined, and inadequate attention paid to supply chain issues.

Now Australia faces a summer of record case numbers, widespread community anxiety and economic disruption. COVID-19 infections and isolation have led to empty supermarket shelves, shuttered hospitality venues, and many people opting into their own form of “shadow lockdown”.

National plan’s miss?

Remember the national plan, Prime Minister Scott Morrison’s four-stage approach to living with the virus, based around hitting vaccination targets and underpinned by modelling from the Doherty Institute that still guides the COVID-19 response in most states?

The plan and modelling was put together in a pre-Omicron world. And although the Doherty Institute did make assessments around a potentially more transmissible future variant — and predicted a steep rise in infections after reopening — there was little guidance in the plan for the economic situation we are experiencing.

Similarly, analysis prepared by Treasury last year to support the national plan seems to focus on the likelihood of lockdowns and other restrictions at various vaccination levels. The modelling found that with more than 80% of the eligible population vaccinated, the economic cost of an outbreak would be $140 million a week. But Treasury didn’t model the cost of a “severe and widespread outbreak that breaches health system capacity”. Whether that describes the kind of situation we’re living through probably depends on which health expert you ask.

Treasury’s analysis also didn’t consider things like “confidence effects of improving certainty and reopening; dynamic effects (such as labour market scarring); social costs; the economic costs of illness and death; and fiscal costs”.

Economics Professor Richard Holden says there’s been a general sidelining of Treasury in Australia’s COVID-19 response. Had it been better engaged in developing the national plan last year, Australia might have been better prepared for some of the economic disruption.

“My own reading of things is Treasury have been under-involved — [it] should’ve been engaged on a whole range of issues,” he told Crikey.

Should we have seen it coming?

Putting aside the scope of the government’s request to the Doherty Institute, and the unexpected emergence of Omicron in late November, Holden believes the shadow lockdown could have been foreseen.

“I think this was very foreseeable,” he said. “In the sense that we know that when there’s a lot of virus circulating, even absent strict lockdown rules, people take evasive action.”

Independent economist Saul Eslake says the potential for the economy to rebound after opening last year has been dampened by high case numbers, and its effect on people’s willingness to do things which stimulate economic activity.

“When we came out of previous lockdowns, we knew there was no COVID,” he said. “This time there was. Nobody — not the government, not forecasters — could’ve anticipated that people would have chosen themselves not to go out. We knew people would curb their movements, we just didn’t anticipate the magnitude of it.”

Eslake also believes that although Omicron was unexpected, there were warning signs from overseas as far back as November about its potential to affect supply chains.

“If you look at things that the [US] Federal Reserve were saying from mid-November onwards, and recent statements from the Bank of England, it was that Omicron’s impact would be felt on supply chains, putting upward pressure on prices,” he said.

Omicron, like all things COVID-19, has thrown up plenty of uncertainties and unknowns. But the strange economic limbo we’re living through was never outside the realms of possibility.

This article was first published by Crikey.