Omicron poses growth risks, monetary policy challenges

November 30, 2021 (MLN): It is too soon to incorporate the effects of the new Omicron coronavirus variant into global economic growth forecasts until more is known about its transmissibility and severity, Fitch Ratings said on Monday.

It is believed that another large, synchronized global downturn, such as that seen in 1H20, is highly unlikely but the rise in inflation will complicate macroeconomic responses if the new variant takes hold, the rating agency’s latest report noted.

The World Health Organization (WHO) designated Omicron a variant of concern on 26 November due to the number of mutations that can affect how it spreads and its health effects.

On 28 November, the WHO said it was not yet clear whether Omicron is more transmissible than other variants, including Delta. Although there is ‘currently no information to suggest’ Omicron’s symptoms are worse, understanding its severity ‘will take days to several weeks.

The possibility of a new variant that requires significant non-pharmaceutical interventions (NPIs), such as highly stringent nationwide lockdowns, to contain transmission is a continuing risk to the global economy. But the experience of most large countries suggests each successive wave of coronavirus infections has diminishing growth effects as economies adapt, for example, through changes in working and consumption patterns.

Moreover, vaccination programmes and improved scientific understanding of the virus reduced reliance on NPIs compared with the beginning of the pandemic. Meanwhile, the political bar to reintroducing full lockdowns has risen. These factors make a repeat of 1H20’s unprecedented global GDP contraction unlikely.

Nevertheless, the return to pre-pandemic levels of activity in the most exposed sectors, such as tourism and international travel, will be disrupted, and the shift back to services from goods consumption may also slow. Broader risks to growth have risen where restrictions on economic activity are likely to be more extensive, the report stated.

In this respect, the report highlighted that vaccination rates could be critical as evidence from Europe and the US shows vaccinations weaken the link between coronavirus infection and hospitalization rates. Higher vaccination rates could; therefore, reduce the risk that public health systems are overburdened, which would necessitate harsher NPIs. The WHO said it is ‘working with technical partners to understand the potential impact’ of Omicron on vaccine effectiveness.

The scale of the policy support provided in response to the pandemic has limited supply-side scarring from the pandemic in developed markets, relative to Fitch’s initial expectations.

However, recent increases in inflation will complicate any policy response to Omicron, which could have an inflationary effect if new lockdowns or voluntary social distancing constrain labour supply recoveries or exacerbate global supply-chain shortages and bottlenecks. Hence, Fitch believes that the central banks could be wary of delaying the normalization of monetary policy settings in response.

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Posted on: 2021-11-30T10:29:38+05:00