Economists game out how Omicron will hurt the global recovery
The omicron variant is dealing a blow to optimistic hopes that the world economy would enter 2022 on a firmer footing, potentially undermining plans by policy makers to focus on inflation rather than weak demand
The omicron variant is dealing a blow to optimistic hopes that the world economy would enter 2022 on a firmer footing, potentially undermining plans by policy makers to focus on inflation rather than weak demand.
One challenge for policy makers battling the economic aftershocks of a sustained outbreak will be the fact that they have fewer options after last year’s stimulus effort.
Only a handful of central banks have tightened monetary policy since the end of last year’s recession and the developed world’s key benchmarks remain around zero, meaning they lack room to come to the rescue again. Governments are already shouldering soaring debt burdens.
“In the absence of concerns about any negative impact of the variant, the Fed would in all probability speed up its tapering of asset purchases, but the uncertain downside effects of the variant likely leads the Fed to postpone any such decision," said Levy.
Traders have rushed to wager that the Federal Reserve and its peers will be slower to raise rates. Futures signal the first Fed hike may not come until July 2022, a month later than was seen last Wednesday when June was the first month with an increase fully priced in.
Even so, Federal Reserve Bank of Atlanta President Raphael Bostic on Friday played down the risk of the new variant and remained “very open" to accelerating the withdrawal of the Fed’s asset purchase program.
European Central Bank Governor Luis de Guindos said he too thought “the effects over the economy will be more limited than last year."
Policy makers have proved adept at changing tack if required. If nothing else, the existence of omicron shows the perils of making predictions in the pandemic age.
“One thing is for sure, the economic uncertainty has risen even higher: economists need a big dose of humility in forecasting the 2022 outlooks," said Subbaraman. “That dose has now got even bigger."
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