Will Omicron derail the global recovery?

Editor's note: Global economic recovery in 2021 faces many challenges, not least because of the continuing COVID-19 pandemic, emergence of new variants of the novel coronavirus and vaccine inequity. The pandemic is changing how we think about economies and societies. So what will the global economic landscape be like next year? Four experts share their views on the issue with China Daily:

Uncertainty over the economic outlook has risen dramatically over the past few days. Has that prompted us (at Oxford Economics) to shift our baseline view of the world economy?

For now, information on the health implications of the Omicron variant of the novel coronavirus is scarce, making the economic repercussions highly unpredictable. At the time of writing, about 30 economies have reported cases of Omicron, but the number of countries where it is present is likely to be substantially higher.

In South Africa, for instance, it's estimated that Omicron has accounted for about 70 percent of the total COVID-19 cases over the past four weeks. Based on this, it seems possible that Omicron may take over from the Delta variant as the dominant strain globally.

Nonetheless, the World Health Organization has cautioned that there is not yet sufficient evidence that Omicron is more transmissible.

The other key uncertainty is the degree to which it reduces the efficacy of existing vaccines. While some of those infected have reportedly been fully vaccinated, it's too early to judge whether this is indicative of lower vaccine efficacy. In addition, even if vaccine efficacy is reduced, it's unclear whether some vaccines will offer better protection than others.

The main repercussion that's clear at this stage is that governments have already reacted to the Omicron news by re-imposing restrictions, particularly on foreign travel. More generally, the latest development underscores that the path to normalcy will continue to be bumpy and uncertain.

What is a plausible best-case scenario?

In a best-case scenario, Omicron could turn out to be a blessing in disguise if the efficacy of the vaccines against serious health outcomes remains high and the symptoms of those infected are generally less serious. In such a scenario, the spread of Omicron could help to expedite the transition back toward normalcy, and any near-term weakness in economic activity due to renewed restrictions might be quickly caught up early next year.

The emergence of a less serious virus strain and the rapid deployment of modified vaccines (Moderna has already said that by early 2022 a reformulated vaccine to tackle Omicron could be available "in large quantities") might reassure people and enterprises that, although COVID-19 is set to linger, its economic impact will lessen over time.

And a plausible worst-case scenario?

Although far from inevitable, we can't discount the possibility of Omicron having greater transmissibility, similar or worse symptoms to Delta, and greater resistance to vaccines.

So, what might be the plausible economic consequences of a more worrisome variant?

In our current COVID-19 downside scenario in which new novel coronavirus variants trigger a protracted period of restrictions and lengthen the disruption to global supply chains, world GDP growth slows to 2.3 percent in 2022 and financial markets weaken.

In this scenario, advanced economies are particularly hard hit with the GDP growth of the United States and eurozone in 2022 being about 2 percentage points below our current baseline forecasts of 4.5 percent and 4.2 percent, respectively.

Based on the current relationship with lockdown stringency, a downward revision of that magnitude would be consistent with restrictions ratcheting up to levels similar to those seen globally from May to September this year. This would lower calendar year global growth from the current 4.5 percent to 4.2-4.3 percent.

In the nearer term, it is likely that governments will tighten measures that restrict international travel or make it more inconvenient and expensive, which may help to push down oil prices and thus energy price inflation globally over the coming months. That would support our view that global consumer price index inflation will ease sharply over the course of 2022.

But greater restrictions, particularly in China and other Asia-Pacific economies that are likely to continue to pursue zero-COVID-19 policies, may add to supply chain strains in the short term and slow the speed at which bottlenecks are cleared.

In addition, tighter restrictions are also likely to result in a more gradual transition of spending from goods back to services. These two factors combined would likely result in goods price inflation in 2022 remaining higher than our current baseline envisages.

The impact on core inflation will also depend on the extent to which an Omicron wave affects demand. While demand effects outweighed supply-side effects during the global lockdown, supply effects typically dominated demand effects in subsequent shutdowns.

On balance, the latter episodes are likely to be more representative than the former when it comes to future inflation trends unless we end up in our worst-case scenario. In that case, demand effects might dominate.

Beyond 2022, though, the impact on inflation is likely to be governed by two factors. The first is the extent to which Omicron enhances or diminishes labor bargaining power. For now, we see the risk of sustained high wage growth as limited. And the second is the extent to which policymakers step in to protect demand.

If the Omicron variant ends up having a significant impact on the economy, then governments and central banks would likely focus their response on the demand impacts rather than the more ambiguous inflation impact.

Ben May is director of global macro with Oxford Economics and Innes McFee is chief global economist with Oxford Economics.

The views don't necessarily reflect those of China Daily.

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