The surging Omicron variant is complicating the recovery for a world economy that continues to be wracked by supply chain chaos, worker absenteeism and faltering assembly lines.
Supermarkets are struggling to stock shelves amid chronic staff shortages. Airlines are grounding flights. Manufacturers are facing disruption and shipping lines remain backed up. At the same time, surging energy prices are adding to inflation, pressuring central banks to raise interest rates even as the recovery slows.
Optimists argue economic hit from Omicron will be limited as vaccinations and boosters allow the disease to shift from an acute phase to an endemic one. Still, as pandemic persists into its third year, it’s becoming clearer by the day that a return to economic normality is some way off.
The global economy is now split between those countries living with the virus and China’s dogged pursuit of Covid-zero.
US Treasury Secretary Janet Yellen said she doesn’t expect the variant to derail the US recovery.
Analysis by Nomura of Omicron’s impact on nations hit early like the UK and Canada shows shorter duration waves, faster descents from peaks and lower death rates than the delta variant. That means the psychological fear factor could soon fade and pent-up demand for services would be unleashed.
Still, as the pandemic persists into its third year, it’s becoming clearer by the day that a return to economic normality is some way off. The global economy is now split between those countries living with the virus and China’s dogged pursuit of Covid-zero.
Such crosscurrents pose an unusual combination of challenges that risk getting baked into the longer-term outlook, according to economists at Citigroup Inc. Their counterparts at JPMorgan Chase & Co. say global growth is now downshifting because of the Omicron drag.
The World Bank has already lowered its growth outlook and International Monetary Fund Managing Director Kristalina Georgieva predicted a difficult year for policy makers, saying 2022 will be like “navigating an obstacle course.” The IMF will release new forecasts in coming days.
“There is a risk of underestimating the economic impact from the surge in omicron cases,” said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.
“While it seems that the severity of the variant is reduced and therefore the economic consequences would be milder and focused on the first quarter, it is still too early to say with certainty given that cases are skyrocketing in many parts of the world.”
The infection surge comes as inflation pressures are forcing some central banks, led by the Federal Reserve, to shift toward raising interest rates. The US central bank, in a meeting of the policy-setting Federal Open Market Committee this week, is expected to signal plans to raise interest rates in March for the first time since 2018.
South Korea has already raised rates this month, its third hike since the summer, and emerging economies are also tightening. China is the exception, cutting rates to shield the economy from a property slump and slowing domestic growth.