As we wrote in our Focus note “Is Omicron the new economic Boogeyman?”, we believe that one should resist the temptation of applying the “2020” template for economic and financial impact. Governments, hospitals and health care systems, businesses, households are much better prepared and equipped to deal with a dreaded but potential return of large-scale social distancing measures. Even if they have already been deeply impacted by the pandemic over the past two years and their capacity to absorb another large shock is possibly reduced.
On this basis, we would expect a moderate impact on global economic growth, despite possibly significant divergences from one country to another. Even if the Omicron variant turns out to be resistant to existing vaccines, thus requiring to development of new drugs and as deadly as previous variants (both of which seem unlikely at this point), a “full stop” scenario for economic activity like the one we saw in 2020 is therefore unlikely and the growth slowdown should be more moderate.
The biggest question mark is on the impact on inflation and central banks. On the one hand, lower economic growth could incite the Fed (and other developed markets central banks) to postpone or cancel some of their planned rate hikes. On the other hand, should the Omicron variant force a new round of lockdowns, factory closures and supply chain interruptions, the global economy could be hit by another large supply shock that would fuel current inflationary trends as demand will, in all likelihood, continue to be strong thanks to government support. This would increase the risk of a stagflation scenario. So in this specific case, bad news is not necessarily good news.