The arrival of a new Covid variant has upset calculations for the time being. An update.
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2022 would not be an year of rapid recovery, as Omicron hits hard
- The story: The sudden arrival of the much-feared next VOC (variant of concern) "Omicron" has led to imposition of travel restrictions in many countries. This will shake consumer and corporate confidence, likely limiting activity in some places just as the Christmas holiday season arrived in Western nations.
- There were hopes: The omicron variant is dealing a blow to optimistic hopes that the world economy would enter 2022 on a firmer footing, potentially undermining plans by policy makers to focus on inflation rather than weak demand. Japan will effectively ban the entry of all foreign visitors as part of its plan to curb the virus spread. It has steadily used a strong policy on incoming travellers since March 2020.
- Market reactions: As soon as the Omicron news arrived, markets worldwide moved to price in the expected economic blow. Expectations for interest-rate increases over the coming year dropped by at least 10 basis points, for the central banks of the U.S., U.K. and Australia. Earlier, monetary policy normalisation was being talked about (the tapering of QE, that is), but that may be delayed further despite rising inflation.
- A lot to know still: What comes next will be dictated by what scientists discover about the new covid-19 variant, including how resistant it is to vaccines and how more transmissible it is than the delta variant which raged in recent months without sending economies back toward recessions.
- The worst case scenario would be if the mutation necessitates a return to growth-crippling lockdowns, which would threaten already strained supply chains and damage recovering demand. That would reignite fears of a stagflationary mix of faster inflation and slower growth.
- There may be four possibilities, one of which includes a downside scenario where a large infection wave in the first quarter of next year sees global growth slow to a 2% quarter-on-quarter annual rate -- 2.5 percentage points below their current forecast. Growth in 2022 as a whole would be 4.2%, or 0.4 percentage point below forecast. A benign outcome is that the mutation doesn't prove as threatening as initially feared. But its emergence serves as a reminder that the pandemic will remain a threat for the global economy, potentially for years to come.
- Has stagflation arrived: The world is not in a stagflation so far, but one more year without cross-border mobility and related supply chain disruptions might push it there. Even still, some economists say the fallout may be less than seen during the 2020 recession.
- Governments, albeit not China's, have shown a reluctance to rush back into lockdowns. And the supply of vaccines partly explains why high frequency data suggest curbs that have been imposed in Europe have proved more flexible and less damaging to growth.
- Businesses and households have adapted to restrictions and lockdowns and so the blows may not be as severe this time around. That would mean localised lockdowns as outbreaks emerge, tighter restrictions on regional travel and a greater likelihood of port shutdowns.
- China has proved adept at managing outbreaks, but the long-run economic costs will mount if highly-transmissible strains are endemic globally.
- If the variant spreads, it could slow the healthy momentum in the economy of the U.S.
- Right before it came: Before 'omicron' emerged, some had tipped a transition in demand away from durable goods and toward services such as leisure, travel and tourism. But that switch may now be delayed -- denting prospects for a global recovery that is already uneven. The International Monetary Fund in October 2021 had warned that the recovery has lost momentum and become increasingly divided. The IMF had calculated gross domestic product for advanced economies will regain its pre-pandemic level in 2022 and even exceed it by 0.9% in 2024; it reckoned emerging and developing markets would still undershoot their pre-pandemic forecast by 5.5% in 2024.
- Indian economy: India’s economy expanded in line with market expectations for the quarter ending in September, but economists say risks like the new Covid variant omicron could weigh on future growth. The Gross domestic product grew 8.4% from July to September — India’s fiscal second quarter — compared to a year ago (as per MoSPI data). During the same period last year, India’s economy contracted 7.4% due to a months-long national lockdown because of the coronavirus pandemic. While the data is likely to be a “clear positive” for the Reserve Bank of India when its monetary policy committee, the recovery was not broad-based and growth disappointed in key areas like non-financial sectors, non-public services and manufacturing. Experts flagged the new Covid variant omicron, which was first identified by South African scientists, as a potential source of uncertainty for India’s economy going forward. There is a risk of a potential increase in restrictions in the first half of 2022, to contain the spread of the new omicron variant.
- Summary: The omicron strain has already been detected in multiple countries from Australia and Hong Kong to the U.K. and the Netherlands. Its emergence rattled markets and has forced countries to rethink their reopening plans. Health experts are concerned about the variant’s transmissibility given its unusual number of mutations and profile that differs from previous variants. By the end of 2022, barring any other major variant wreaking havoc, the direction and shape of recovery would be apparent.
- EXAM QUESTIONS: (1) What is the rationale behind many European nations imposing a travel ban on South African outbound passengers? Explain. (2) Explain what makes the Omicron dangerous. (3) What is the clear risk that Omicron variant poses to Indian economy? Explain.
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