01 Feb 2022
Omicron is more infectious but less virulent, reducing its impact on economies…
Omicron case numbers worldwide continue to surge to unprecedented levels, but the silver lining is that the latest Covid variant appears to be less dangerous to both human and economic health.
The number of people hospitalised are considerably lower than during previous major waves. And when people are hospitalised, serious complications or fatalities are fortunately less frequent.
As a result, government-mandated restrictions are expected to remain modest as policymakers follow a ‘living with’ Omicron strategy – tolerating high case numbers so long as healthcare systems are not put under excessive strain (see Chart 1).
Source: Oxford, aRI, January 2022
The notable exception to this strategy is in China. There we expect authorities to double down on their ‘zero-Covid’ plan to allow a roll out of domestically-produced mRNA vaccines and to avoid testing the efficacy of China’s current vaccines.
Key events such as next month’s Winter Olympics and the 20th Party Congress later this year (where President Xi Jinping is widely expected to take up an unprecedented third term) suggest that even if Chinese vaccines offer protection against severe illness that’s comparable to their western counterparts, the authorities will be wary of letting Omicron loose because case numbers could easily hit more than 1 million per day.
Limited restrictions may suggest limited economic drag, but the sheer number of Omicron cases means that the impact is shifting from government-mandated curbs on activity to worker shortages, amplified by isolation requirements. Behavioural responses will also dampen activity as households become more cautious about dining out, tourism and attending public events.
We now expect first quarter (Q1) global growth to be some one-third of that assumed in our November forecast (see Chart 2). Growth has been pushed below trend, but this represents a relatively mild shock compared to previous outbreaks.
Thereafter, we’re forecasting a partial rebound in activity during the second quarter (Q2), as those light-touch measures put in place at the start of the year are relaxed, and economic headwinds linked to more cautious consumer/business behaviour and worker shortages ease up.
Source: Haver, aRI, January 2022
The key reason why gross domestic product (GDP) doesn’t fully snap back in Q2 is because of China’s longer maintenance of its ‘zero-Covid’ policy, which contributes to a slightly bumpier profile and pushes back some its recovery into 2023.
The forecast is also dragged modestly lower because the US Federal Reserve and other major developed market central banks are set to withdraw policy accommodation at a faster pace, in part as Omicron worsens inflation-fuelling shortages.
The emergence of Omicron has important implications for the composition of economic activity, potentially adding pressure to already stretched global supply chains.
The good news is that global inflation should moderate significantly over the course of 2022 as the base effects from previous surges in energy, food, and durable goods inflation subside. The key questions will be: when; by how much; how much of the work will need to be done by policy; and how much extra inflationary pressure will Omicron add?
Shorter Omicron waves could reduce the potential disruption to manufacturing in the Association of Southeast Asian Nations (ASEAN) economies, but China’s ‘zero-Covid’ strategy may generate periodic disruptions.
Given the highly-connected global manufacturing network, supply-chain disruption will depend crucially on which countries, ports and factories are impacted, and when.
Omicron is likely to cause a modest synchronised slowdown of global growth in Q1. We expect a limited recovery later in the year, in part, because Omicron has the potential to speed up the transition towards endemic living in many major economies.
The big picture masks growing divergence. Differences in local Covid trends and associated restrictions, domestic supply-demand balances and inflation, policy settings and exposure to global goods trade, all remain as reasons to expect headwinds to abate unequally.
Omicron is also a reminder of the considerable risks that remain from new Covid variants. Its reduced virulence is certainly welcome, potentially ushering in a more favourable balance between public health and human activity.
But we should be mindful that changes in behaviour can shift this delicate trade off. Moreover, there’s no certainty that the next major variant will have Omicron’s weakened virulence.
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