Omicron poses risks to global economic growth, inflation: Rating agencies

LONDON (REUTERS, BLOOMBERG) – The Omicron Covid-19 variant could hurt global growth prospects while also pushing prices higher, rating agencies Fitch Ratings and Moody’s Investors Service said, after the World Health Organization said the variant carried a very high risk of infection surges.

“The Omicron variant poses risks to global growth and inflation, especially as it comes during a period of already stretched supply chains, elevated inflation and labour market shortages,” Elena Duggar, associate managing director at Moody’s, told Reuters in emailed comments.

The variant is also likely to hit demand during the upcoming holiday travel and spending season, according to Ms Duggar.

“If the new variant affects global market risk appetite, it would cause further financial stress for debt issuers with large financing needs. For example, emerging market countries that rely on international market borrowing may face heightened refinancing risks”, she said.

Fitch Ratings said separately that it was too soon to incorporate the effects of the Omicron variant into its economic growth forecasts until more is known about its transmissibility and severity.

“We currently believe that another large, synchronized global downturn, such as that seen in the first half of 2020, is highly unlikely but the rise in inflation will complicate macroeconomic responses if the new variant takes hold,” Fitch said.

More countries closed borders on Monday, casting a shadow over economic recovery from the two-year pandemic. Big airlines acted swiftly to protect their hubs by curbing passenger travel from southern Africa, fearing that a spread of the new variant would trigger restrictions from other destinations beyond the immediately affected regions, industry sources said.

US President Joe Biden urged Americans not to panic and said the United States was working with pharmaceutical companies to make contingency plans if new vaccines were needed.

Mr Biden said the country would not go back to lockdowns this winter, but urged people to get vaccinated, get their boosters and wear masks.

An infectious disease expert from South Africa, where scientists first identified Omicron, said it was too early to say whether the variant caused more severe symptoms than previous variants, but it did appear to be more transmissible.

The experience with past variants suggests that, even with some restrictions on international travel, the spread of the Omicron variant may be hard to stop, Ms Duggar told Reuters.

“Should the new variant lead to another rising wave of Covid infections, the hardest-hit economies will be those with lower vaccination rates, higher dependence on tourism and lower capacity to offer fiscal and monetary policy support to offset the growth impact of the new wave of infections.”

The Omicron variant also poses new challenges for central bankers by threatening economic growth while adding to inflation pressures.

That’s the initial analysis of economists, who warned that possible new restrictions on activity risk derailing plans to withdraw monetary stimulus while reinforcing the same imbalances that have fueled the current wave of surging consumer prices.

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Omicron has hit the world just weeks away from key decisions by global central banks, with the Federal Reserve possibly accelerating a wind-down of its stimulus, the Bank of England potentially about to raise interest rates, and the European Central Bank plotting how to ease the euro zone off of emergency bond buying.

Fed chair Jerome Powell referenced the twin dynamics that Omicron presents for the economy in prepared remarks on Monday (Nov 29) ahead of a congressional hearing. Omicron poses “downside risks” to employment and growth, but also “increased uncertainty” for inflation, he said.

“It may make central banks question the timing and extent of rate increases, which markets had been pricing in over the next year,” said Alex Brazier, a strategist at BlackRock Investment Institute and former senior official at the BOE. “The question is, how much does it delay the restart” of economies, he said. “Delay means weaker growth in the short term, but stronger growth later.”

Supply Chains

Complicating the decision for policy makers is the risk that Omicron leads to fresh curbs in manufacturing hubs such as China, aggravating supply-chain issues, while intensifying labour shortages elsewhere as health fears deter people from returning to work.

Such forces could further spur inflation, which already faces a potential acceleration thanks to robust consumer demand heading into the holiday season, supported by pent-up savings.

On the flip side, disinflationary impulses could include further sell-offs in financial markets like the slump in energy prices at the end of last week.

“It’s bad for growth if lockdowns return, but less clear on inflation,” said Jordan Rochester, a strategist at Nomura International. “Medium term, it’s not clear it’s disinflationary, given supply chains will struggle for longer, consumer demand remains strong and household balance sheets are stronger than they were in 2019.”

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Inflation Worsens

The inflation picture darkened further on Monday, with Germany reporting that prices surged more than expected in November and Spain registering the fastest rise in the cost of living for almost three decades. Euro-area wide data is scheduled for release on Tuesday.

Even before the new variant hit, Dutch National Bank Governor Klaas Knot alluded to the risk of further price pressures, as he contemplated the potential impact of new lockdowns to contain rising infections.

While the measures “will surely have a moderating impact on economic activity, the impact on inflation will actually be more ambiguous, because it might also reinforce some of the concerns we have around supply bottlenecks,” Mr Knot, one of the ECB’s most hawkish officials, told Bloomberg TV last week.

For Neil Shearing, chief economist at Capital Economics, Omicron increasingly looks like a different pandemic shock from the one central bankers were used to.

“Compared to previous waves of the virus, which were on balance disinflationary, a major new wave could now be inflationary,” he said.

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