Economic impact of omicron variant expected to be small, analysts say

Economists generally expect the world economy to relatively easily outrun any new wave of coronavirus infections caused by the omicron variant, even as the latest version of the virus has clouded the economic landscape with uncertainty.

A central reason for its relatively optimistic initial assessment is the increasing ability of economies to adapt to the previous restrictions imposed by Covid-19, along with vaccination programs.

Any new wave of the virus, therefore, would hardly contain the rise in inflation, economists said, but would raise doubts among central bankers about the decision to tighten monetary policy as soon as possible.

Among the wide range of analysts who published Monday morning notes and forecasts —whether from investment banks or consultancies—all emphasized the uncertainty generated by the omicron variant’s ability to evade existing vaccines, cause serious and spread faster than the delta variant.

At the same time, however, few thought there was a need to tear up their current economic projections.

Paul Donovan, chief economist at UBS Global Wealth Management, said travel and tourism can be hit hard in some places, but that is often a small part of total economic activity. It is “unlikely that [a variante ômicron] change the broader economic narrative at this stage,” he added.

Holger Schmieding, chief economist at Bank Berenberg, said: “From wave to wave, the economic damage has diminished.”

He indicated the contrast between Covid-19’s first and second European waves. While the former eliminated 15% of economic activity in the eurozone in the second quarter of 2020, the general adaptation to living with the virus led to a drop of only 0.7% in GDP (Gross Domestic Product) in the second most severe wave, in early 2021.

Furthermore, even though the omicron variant has greater resistance to current vaccines, the prevailing view is that inoculation against it will help reduce the economic impact.

Daniele Antonucci, Chief Economist at Quintet Private Bank, said: “The developed world can now rely on high vaccination rates, it has increased its capacity to develop and produce vaccines, and has shown that it can adjust work patterns quite flexibly and adapt from more general way”.

Most economists believe that any slowdown in economic activity is also unlikely to contain the recent rise in inflation, especially in goods where demand has outstripped global supply, which has been torn apart by disruptions.

Neil Shearing, chief economist at Capital Economics, said: “A virus-related increase in spending on goods, or port closures, would exacerbate existing supply tensions and add upward pressure to goods inflation.”

“It is not clear whether [a variante ômicron] it’s disinflationary,” said Jordan Rochester, a currency strategist at Nomura in London.

While acknowledging that there is enormous uncertainty, Goldman Sachs economists have produced four possible scenarios for any approaching omicron wave, including one that is a false alarm and the new variant proves no more contagious than Delta.

Its main negative scenario suggested that there would be only a small economic impact from the virus in 2022, because the impact of each subsequent blockade in the past had been weaker. These restrictions would significantly reduce global growth in the first quarter until new vaccines arrive, bringing a robust recovery.

Over the course of the year as a whole, Daan Struyven, senior global economist at Goldman Sachs, said global growth would decline from 4.6% in 2022 to 4.2%. However, there would be a corresponding increase in 2023 growth as the recovery takes hold again.

In its most severe setting, disease severity and immunity to hospitalization were substantially worse than for the delta variant. But, Struyven added, there is also a positive scenario where the severity of the infection is lessened and the global economy could “normalize”.

Uncertainty should encourage central banks, particularly the Federal Reserve and the Bank of England, to stop and wait a little longer before deciding whether to tighten monetary policy, either by slowing the slowdown in US asset purchases or by delaying rate hikes interest rate in the UK.

In a note on Friday, European economists at Citi wrote that the new uncertainty would be “a big wake up call” for central banks and that “the path to recovery may not be as simple as originally thought”.

Translated by Luiz Roberto M. Gonçalves