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January 12, 2022

Macro view: Omicron outbreak forces lockdown in New South Wales

Some economists state that the Omicron outbreak has sparked a de facto lockdown in New South Wales, forcing businesses to shut down due to virus-induced staff absences amid few Covid-19 restrictions and no public health orders in place.

Jim Stanford

Jim Stanford, economist and director of the Centre for Future Work at the Australia Institute, retweeted an article shared by the Australia Institute, on how the Omicron outbreak is smashing Australia’s most populous state, New South Wales. He stated that the economic situations are far worse than an actual lockdown.

Despite few restrictions, the Omicron wave is impacting everything in NSW, right from its healthcare system to the hospitality industry. Analysts from Stanford’s team have predicted cases to peak in mid-January, predicting up to one-third of the workers in NSW to be in isolation in the upcoming weeks.

Surging Covid-19 hospitalisations have led to a burnout among staff, with more than 4,000 frontline health staff having been furloughed due to Covid-19 or due to isolation needs, leading to critical staff shortages across some of the largest hospitals in Sydney.

Alberto Bagnai

Alberto Bagnai, economist and associate professor of economic policy at the Gabriele d’Annunzio University, retweeted an interview shared by the European Central Bank (ECB) on pandemic-related special factors having led to unusually low inflation in 2020 and unusually high inflation in 2021. However, Philip R. Lane, chief economist and member of the executive board of the ECB, has stated that 2022 will be a transition stage where high inflation will eventually fade.

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Lane stated that he expected the pandemic to end in 2023 and 2024, with inflation stabilising at a lower level, almost at about 1.8%, which is close to the 2% target compared to what the euro area was before the Covid-19 outbreak.

He also emphasised that the inflation rate is currently not going back to its pre-pandemic level, but the euro area has made progress by offering fiscal and monetary support. Therefore, the economic recovery in the following two years will bring inflation closer to the target.

Dani Rodrik

Dani Rodrik, economist at the Harvard Kennedy School, shared an article on how keeping an open mind on unfashionable and unorthodox ideas, and making sure to learn from evidence, applies to the current inflation debates in the US and Turkey. Therefore, he believes that deriding currently unfashionable ideas on inflation as ‘science denial’ similar to rejecting Covid-19 vaccines, as some prominent economists have done, is a misplaced idea.

Rodrik further added that the current Covid-induced inflation in the US and other advanced nations, for example, differs significantly from the 1970s inflation. It is neither chronic till date, nor is driven by wage-price spirals and backward indexation. Therefore, policymakers in developed countries should not be worried over the inflation spike.

The best argument against price controls, therefore, is not that they are incompatible with science, but that nothing radical needs to happen. Likewise, the same caution should apply to central banks being patient before raising interest rates amid a relentless pandemic.

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