Several countries have banned all foreign visitors from entering to limit the spread of the virus. (Represent)
The omicron variation is dealing a blow to optimistic hopes that the world economy will enter 2022 on a firmer footing, potentially undermining policymakers’ plans to focus on inflation instead of weak demand.
Imposing travel restrictions will shake consumer and business confidence, potentially limiting activity in some places just as the holiday season unfolds in many economies. Television station NTV reported that Japan will effectively ban the entry of all foreign visitors as part of a plan to curb the spread of the virus.
The market quickly turns to price in an economic hit. Expectations for a rate hike next year fell by at least 10 basis points on Friday for the central banks of the US, UK and Australia.
What happens next will be determined by what scientists discover about the new covid-19 variant, including how much more resistant it is to the vaccine and its transmissibility than the already raging delta variant. in recent months without sending economies back into recession.
The worst-case scenario would be if the spike necessitated a return to the growth lockdown, which would threaten already strained supply chains and hurt recovering demand. That would raise concerns about a stagnant inflation mix between faster inflation and slower growth.
Economists at Goldman Sachs Group Inc. pointed out four possibilities, one of which includes a downward scenario as a large wave of infections in the first quarter of next year sees global growth slow to a 2% quarterly rate. five – 2.5 percentage points. lower than their current forecast. Growth in 2022 will generally be 4.2%, or 0.4 percentage points lower than forecast.
A benign outcome is that the mutation is not as dangerous as initially feared. But its arrival serves as a reminder that the pandemic will remain a threat to the global economy, likely for years to come.
“We are not yet in a state of stagnant inflation,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA. “But another year without cross-border movement and the associated supply chain disruption could push us there.”
Smaller impact
Even some economists still say the downturn could be less than in the 2020 recession.
Governments, though not Chinese, have shown reluctance to return to the strikes. And vaccine delivery partly explains why high-frequency data show that restrictive measures already in place in Europe have proved more flexible and less damaging to growth.
“Businesses and households have adapted to the restrictions and lockdowns and so the magnitude of the impact has been,” said Rob Subbaraman, head of global market research at Nomura Holdings Inc. may not be serious during this time period”.
“That means local closures during outbreaks, tighter restrictions on travel within the region, and a higher likelihood of port closures,” he said. “China has proven adept at managing outbreaks, but the long-term economic costs will increase if highly transmissible strains become endemic globally.”
If this variation spreads, “it could slow the economy’s healthy momentum,” said Mickey Levy, chief US and Asia economist at Berenberg Capital Markets.
Markets steadied in early Asia trading on Monday following Friday’s sharp sell-off as news of the variant surfaced. The S&P 500, Nasdaq 100 and European contracts jumped and oil prices rallied back above $70 a barrel.
Before the omicron appeared, some economists assumed that demand shifted from durable goods to services such as entertainment, commuting and tourism. But that transition may now be delayed – hurting the outlook for an already uneven global recovery.
The International Monetary Fund in October warned that the recovery had lost momentum and became increasingly divided. The Fund calculates that gross domestic product for advanced economies will return to pre-pandemic levels by 2022 and even exceed 0.9% by 2024; It reckons that emerging and developing markets will remain below the pre-pandemic forecast by 5.5% in 2024.
.@WHO specifies a new variant of interest “Omicron” discovered in South Africa. While much has yet to be determined, this is yet another remarkable reminder to quickly immunize the world. The pandemic doesn’t end anywhere unless it ends everywhere. https://t.co/Q5uHPurY6qpic.twitter.com/W5jY5AiIwF
– Gita Gopinath (@GitaGopinath) November 26, 2021
Policy options
One challenge for policymakers in the face of the economic aftershocks of the lingering outbreak will be the fact that they have fewer options after last year’s stimulus effort.
Only a handful of central banks have tightened monetary policy since the end of last year’s recession and key developed world benchmarks remain at zero, meaning they lack room for a one-time rescue. again. Governments are saddled with heavy debt burdens.
“In the absence of concerns about any negative effects of this variant, the Fed will accelerate the gradual reduction of asset purchases, but the uncertain negative effects of the variant will be,” Levy said. This could cause the Fed to delay any such decision.”
Traders rushed to bet that the Federal Reserve and its peers would be slower to raise interest rates. Futures contracts that signal the first Fed hike could come July 2022, a month later than last Wednesday when June was the first month of an all-price increase.
Even so, Federal Reserve Bank of Atlanta President Raphael Bostic on Friday downplayed the risks of the new variant and remained “very open” to accelerating the withdrawal from the Fed’s asset purchase program.
European Central Bank Governor Luis de Guindos said he also thinks “the effects on the economy will be more limited than last year.”
Policymakers have proven adept at changing strategy if required. If nothing else, the existence of omicrons shows the dangers of making predictions in an age of pandemic.
“One thing is for sure, economic uncertainty is even higher: economists need to be a little more modest in forecasting the 2022 outlook,” Subbaraman said. “That dose is now even greater. .”
