Omicron is unlikely to bring a repeat of 1H20’s unprecedented global GDP contraction due to several reasons, said Fitch Ratings recently.
"While it's 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, 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," the credit rating agency noted.
The World Health Organization (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.
The possibility of a new variant that requires significant non-pharmaceutical interventions (NPIs), such as highly stringent nationwide lockdowns, to contain transmission is a continuing risk to the global economy, Fitch said.
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, the firm added.
In addition, vaccination programmes and improved scientific understanding of the virus reduced reliance on NPIs compared with the beginning of the pandemic, Fitch pointed out, adding that the political bar to reintroducing full lockdowns has risen.
These factors make a repeat of 1H20’s unprecedented global GDP contraction unlikely, Fitch concluded.
But the firm said that the return to pre-pandemic levels of activity in the most exposed sectors, such as tourism and international travel, will be disrupted while the shift back to services from goods consumption may also slow.
Broader risks to growth have risen where restrictions on economic activity are likely to be more extensive, Fitch predicted.
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 Fitch’s initial expectations, the firm said.
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 said.
“Hence, we believe central banks could be wary of delaying the normalisation of monetary policy settings in response,” Fitch predicted.
