Omicron to infect global economy early next year

Economists have lowered growth forecasts for early next year, citing disruptions from the latest Covid-19 surge.

Economists expect the Omicron variant to cause a short-term soft patch for US spending and broader economic growth. Above, Lower Manhattan. Picture: Matteo Colombo

A northern-winter surge in Covid-19 cases driven by the Omicron variant is prompting economists to downgrade US and global growth expectations in the early part of 2022 as businesses struggle with absenteeism and consumers stay home to avoid getting sick.

Several economists have recently cut forecasts for the US following early signs that a sharp rise in cases has already disrupted parts of the economy.

Airlines cancelled thousands of flights over the Christmas holiday weekend and into Monday, in part due to Covid-19-driven staff shortages.

The federal Centres for Disease Control and Prevention on Monday reduced the amount of recommended time that infected people who are asymptomatic should isolate to five days, from 10, as more research is done and thinking evolves on how best to manage the pandemic.

In Europe, leaders reviewed whether to put in place new limits on activity as New Year celebrations approach. The UK government decided against tightened restrictions after reviewing hospitalisation data, but Health Minister Sajid Javid said people should celebrate New Year’s Eve outside if possible.

US officials are seeking ways to ease pressure on hospitals while also limiting business disruptions.

“Broadly speaking, each new wave is going to do a little less damage than previous waves,” said Mr Zandi, adding that healthcare providers had become better at treating the virus and businesses were getting better at adjusting.

Credit and debit card data from JPMorgan Chase indicate that spending in services-related categories such as airlines and restaurants remained depressed last week. Now, the surging Omicron variant was “going to change people’s behaviour at the margin” and crimp demand for the spending on services that made up a large slice of economic growth as people stayed home, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Many food manufacturers, meanwhile, are planning price increases again next year, as inflation reaches levels not seen in decades.

Pantheon Macroeconomics recently cut its forecast for US growth to 3 per cent annualised in the first quarter of 2022, from 5 per cent.

Other economists are voicing concerns about downside risks to their existing projections.

“It’s unfortunate [the Omicron variant] had to break out during the holiday season, even in places like New York City, where people are highly vaccinated,” said Pooja Sriram, US economist at Barclays. She had not lowered her forecast for growth in the first quarter but said she was keeping a close eye on the outbreak.

Earlier this month, the chief economist of the Organisation for Economic Co-operation and ­Development warned that should the Omicron variant sidestep existing vaccines, the world economy could face a sharper slowdown than previously expected.

In the UK, record infections ahead of Christmas put pressure on Prime Minister Boris Johnson to bring in more stringent measures to ease pressure on hospitals. But Mr Johnson, who faces resistance to tighter restrictions from within his party, said there wasn’t enough information about the new variant to justify imposing them before Christmas.

Current government guidance in England is for people to work from home and avoid unnecessary social contacts. In Scotland, Northern Ireland and Wales, limits have been placed on social gatherings and mass events as Omicron spreads.

Still, the new variant pushed many Britons to stay home over the festive period, prompting businesses to seek economic aid. Last week, the UK Treasury ­offered grants of up to £6000, ($11,130) to businesses in the hospitality sector.

Recent spending data suggests the rise of the Omicron variant could be causing people to curtail spending outside the home. Restaurant visits in December have slipped as more people stayed home. For the week ended December 26, the number of seated diners in US restaurants was down 27 per cent from 2019 levels, the widest gap since April, according to data from OpenTable.

In-store spending at retailers and restaurants also fell in late November and early December. For the week ended November 30, spending was down 5.3 per cent from the previous week. For the week to December 7, it was down 5.6 per cent, before rising 3.4 per cent in the week to December 14, according to payment-card spending data tabulated by the Commerce Department.

For now, economists expect the Omicron variant to cause a short-term soft patch for US spending and broader economic growth. It comes as central banks across the globe tee up expected interest-rate rises next year in an effort to tame inflation. The Federal Reserve has set the stage for a series of increases beginning in the northern spring.

The Wall Street Journal