Omicron Likely to Increase Growth Risks and Policymaking Challenges - Fitch

CEYLON TODAY | Published: 2:00 AM Dec 1 2021
FT Omicron Likely to Increase Growth Risks and Policymaking Challenges - Fitch

It is too soon to incorporate the effects of the Omicron coronavirus variant into our economic growth forecasts until more is known about its transmissibility and severity, global rating giant Fitch Ratings says.

 “We currently believe that another large, synchronised 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,” it stated. The World Health Organisation (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 nonpharmaceutical 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 down. 

Broader risks to growth have risen where restrictions on economic activity are likely to be more extensive. In this respect, vaccination rates could be critical as evidence from Europe and the US shows vaccinations weaken the link between coronavirus infection and hospitalisation rates. Higher vaccination rates could, therefore, reduce the risk that public health systems are over-burdened, 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 our 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,” Fitch stated. Hence, Fitch believe central banks could be wary of delaying the normalisation of monetary policy settings in response.

CEYLON TODAY | Published: 2:00 AM Dec 1 2021

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