Home / Economy / Covid-19 variant Omicron threatens US, global economies

The global economy could suffer a modest blow from the Omicron variant of Covid-19, though the scale of damage will hinge on the potency of the strain itself, economists say.

Tourism spending will likely weaken, and perhaps so too will restaurant spending and shopping at stores. But compared with the initial wave of Covid-19 in March 2020 and the Delta variant this summer, Omicron’s threat to economies will likely be less severe, economists say, in part because each new virus strain has had a diminished economic impact.

The U.S. and global economies have also gained momentum after stimulus in response to earlier disruptions from the pandemic and a strong return of demand, particularly in the U.S. Supply-chain issues that have limited growth recently showed signs of easing.

Vaccination rates are far higher than earlier in the year, which will likely reduce the health risks posed by Omicron. Governments are less likely to impose widespread shutdowns than earlier in the pandemic, given political resistance and new information about what measures are the most effective at containing the virus.

President Joe Biden said Monday his administration would focus on increasing vaccinations rather than seeking new restrictions on commercial activity.

Economists predict Omicron could slow growth this quarter and early next year, but the impact won’t lead to a contraction.

“It takes a boom into a boomlet," said Diane Swonk, chief economist at accounting and advisory firm Grant Thornton LLP. “We’ve got a lot of momentum coming in and that helps."

Oxford Economics said it would likely project global gross domestic product to grow 4.2% next year, down a little from its prior estimate of 4.5%.

Health officials on Monday were still trying to determine how contagious and deadly Omicron is and how far it had spread beyond South Africa, where it emerged earlier this month. The strain’s damage to the economy will depend on how many people it sickens and kills, and how aggressively governments, consumers and businesses respond, economists say.

“It’s the restrictions that are imposed in response to the virus that cause the bulk of the economic damage," said Neal Shearing, chief economist at Capital Economics. “So, the key question is how governments will respond as Omicron spreads. This, in turn, will hinge on the extent to which it escapes the vaccines and, importantly, causes strains in national healthcare systems."

The most immediate effect will be on travel. Governments around the globe put in place new restrictions on who could cross their borders, mainly by halting flights from southern African countries.

The new travel restrictions, along with potentially rising consumer fears about traveling, will likely sap tourism spending at airlines, hotels, museums and restaurants, economists say. Beyond that, the new strain could discourage shoppers from visiting department stores and boutiques, and families from traveling to visit loved ones during the holidays.

On the supply side, the new strain could keep workers home, further restraining the ability of factories to pump out goods to meet demand. Such a development would further snarl global supply networks and risk stoking stronger inflation. Inflation is already at a three-decade high in the U.S. and is high in other parts of the world due to global shortages and strong demand.

The U.S. economy—the world’s largest—appears well positioned to weather any blow. Economists believe that output was growing at an annual rate of above 7% in the current quarter, a strong pickup from 2.7% growth in the third quarter, which was hampered by the Delta variant of Covid-19. More than two-thirds of U.S. adults are fully vaccinated, federal data show, according to the Centers for Disease Control and Prevention.

Still, Omicron could complicate the inflation outlook and the Federal Reserve’s plan to reduce its asset purchases starting this month. Fed Chairman Jerome Powell, in testimony prepared for a Tuesday congressional hearing, said Omicron exacerbates inflation uncertainty and poses other economic risks. The annual inflation rate reached 5% in October, under the Fed’s preferred gauge, well above the central bank’s 2% target.

If Omicron further crimps the supply of workers and goods, prices of certain services and products could rise further. However, if consumer demand weakens—if, for example, households cut spending at restaurants and travel—energy prices could fall, offsetting other increases and bringing overall inflation in check.

Several economists said it was too early to tell what effect the Omicron variant would have on the Fed’s tapering of bond purchases and interest-rate plans.

One big question is whether the new variant will reduce or eliminate the effectiveness of existing vaccines. Throughout the pandemic, economies have incurred the largest costs when governments freeze large segments of their economies out of fear that health systems will be overwhelmed.

Europe, already experiencing a new surge of virus cases, has put in place fresh restrictions. The U.K., France, Italy, Germany and the Netherlands have halted flights from a number of southern African countries where the new variant is thought to be widespread.

The U.K. reimposed masking requirements on public transport, stores and other enclosed spaces after identifying multiple cases of Omicron in England and Scotland.

Some governments are raising the pressure on the unvaccinated to get shots, by widening the use of so-called vaccine passports for people to access public transport and workplaces.

The timing of the new variant’s arrival is unfortunate, with the economically dominant Northern Hemisphere about to enter winter.

“If Omicron is indeed the dreaded new variant which is more transmissible and better able to escape current immune responses than Delta, it would hit the global economy and especially continental Europe at a bad time," said Holger Schmieding, chief economist at Germany’s Berenberg Bank.

In Asia, the new variant has already put on hold some countries’ plans to ease border controls and coronavirus restrictions.

Japan said it would close its borders to foreigners until the end of the year. Australia postponed plans to allow students and skilled workers to enter the country until at least Dec. 15. Indonesia said it would require incoming travelers to quarantine for a week upon arrival, compared with three days previously.

Countries such as Malaysia and Vietnam that are integral to global-supply chains have weathered recent increases in Covid-19 caseloads caused by the Delta variant without ordering the kind of factory shutdowns that were imposed in earlier stages of the pandemic, largely thanks to widening vaccine coverage.

Economists say they don’t anticipate a broad return in Asia of strict zero-Covid-19 strategies that aim to eliminate all transmission, though the intensity of any new restrictions will depend on how dangerous Omicron proves to be.

The exception is China, where the emergence of Omicron will likely reinforce Beijing’s commitment to its strict approach, said Craig Botham, chief China economist at Pantheon Macroeconomics in London.

“Assume 2022 is another year where China is essentially closed off," he said.

With Omicron spreading, businesses and investors should prepare for further unpredictable closures of factories and ports in China and growth-sapping restrictions on mobility and services, Mr. Botham said.



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