Omicron – will the economic impact be mild or severe?

After limping back from the COVID-19 pandemic last year, the global economic recovery has been rocked by the rapid rise of the omicron variant.

The travel industry has once again been plunged into disarray, workers have been forced to isolate themselves at home, and governments are faced with a difficult choice between imposing restrictions or letting the economy run.

Could the highly contagious variant of omicron have a severe impact on recovery? Or will its mild symptoms prevent the economy from sinking again?

What impact on growth?

The director of the International Monetary Fund, Kristalina Georgieva, warned last month that forecasts for global economic growth may have to be reduced following the emergence of the omicron.

The IMF previously forecast growth of 5.9% for 2021 and 4.9% this year, but it may now revise its estimates later this month.

To lessen the blow to the economy, US health officials have cut the isolation period for asymptomatic cases from half to five days.

Mark Zandi, chief economist at Moody’s, said he expects US growth of 2.2% in the first quarter, more than half of a previous estimate of 5.2%.

“Omicron is already causing economic damage, as evidenced by declining credit card spending, declining restaurant reservations, flight cancellations and the return of many schools to online learning,” Zandi said.

“However, I expect omicron to pass quickly and growth to rebound in the second quarter, and growth for the year to be unaffected,” he added.

“Overall, I think each wave of the virus does less damage to the health care system and the economy than the previous wave.”

In the eurozone, tighter restrictions, consumer cautiousness and absenteeism will reduce economic activity in the coming weeks, but the economy will rebound in February, according to Andrew Kenningham, chief economist Europe at Capital Economics.

Countries with lower vaccination rates, which are primarily developing economies, face greater uncertainty, and a ‘zero-COVID’ policy in China could dampen the growth of the world’s second-largest economy as it locks cities down whole.

Will tourism suffer?

The travel industry has been eagerly awaiting a rebound in 2022 after being devastated by border closures and blockades.

But the emergence of omicron during the key winter vacation period has resulted in thousands of flight cancellations, forced cruises to dock, and fewer hotel bookings.

Investors, however, have been bullish as airline and cruise shares have risen in recent weeks.

“The markets seemed to be watching the post-omicron period,” said Alexandre Baradez, analyst at IG France.

Is inflation going to get worse?

The economic recovery had a negative side effect: Inflation reached decades high levels in the United States and Europe as energy prices soared and growing demand faced supply shortages.

Central banks have insisted that the high inflation is only temporary and prices will eventually come down, but it has hurt consumers and businesses.

Could it get worse?

“The impact of omicron on consumer demand is far from certain, but people who stay home because of the variant are more likely to spend their money on retail products rather than services. such as dining out or in-person entertainment, ”said Jack Kleinhenz, Chief Economist. to the National Retail Federation of the United States.

“This would put additional pressure on inflation, as supply chains are already overloaded across the world,” he said.

Supply chain bottlenecks caused shortages of many materials last year, pushing up prices for many products. A higher demand for products on the available goods could further fuel the price increase.

The Federal Reserve rocked the markets this week as the minutes of its December meeting showed the US central bank was ready to tighten monetary policy more aggressively to bring inflation under control.

Elsewhere, inflation is eroding purchasing power after hitting double-digit numbers in Brazil and Nigeria.

In Britain, UK Chambers of Commerce said 58% of businesses expect their prices to rise in the next three months.

End of the recovery?

Governments rolled out massive stimulus packages in 2020 to save their economies, racking up $ 226 trillion in debt, according to the IMF.

Leave plans to keep people at work “made sense” as there was so much uncertainty and entire industries were shut down, said Niclas Poitiers, a researcher at Bruegel, a Brussels-based think tank.

“I do not yet see the need for massive funds for the economy,” Poitiers said.

Instead, the United States and Europe are investing in structural programs, such as President Joe Biden’s $ 1.75 trillion “Build Back Better” climate and social spending plan.

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