A Crash Course in Omicronomics

Sussing out the impact of the new coronavirus variant on growth and inflation

- By Enda Curran, Simon Kennedy, and Philip Aldrick

Hopes that the world economy would enter 2022 on a firmer footing appear to have been dealt a fresh blow. Following media reports on Nov. 24 that a new Covid-19 variant had been identified in South Africa, markets moved swiftly to price in the perceived threat, while economists at investment firms and central banks got to work gaming out the potential hit to the global recovery.

Government leaders and financial policymakers tried their best to soothe the anxious public. “This variant is a cause for concern. Not a cause for panic,” said U.S. President Joe Biden after a private briefing from his health advisers on Nov. 26. His words echoed those of European Central Bank chief Christine Lagarde, who in an interview on Italian radio the day before emphasized the positive, saying “there is a risk, but I think we’ve learned a lot. We know this enemy, we know the instruments we need to use and precautions we need to take, people have been vaccinated, there are new therapies.”

What comes next will be dictated by what scientists discover about omicron, including how resistant it is to vaccines and how it compares with other strains in terms of speed of transmission and severity of disease. Delta has raged in recent months without tipping economies back into recession.

The worst case scenario would be if the omicron variant necessitates a return to growth rippling lockdowns, ushering in the dreaded combination of faster inflation and slower growth. “We are not yet in stagflation,” says Alicia Garcia Herrero, chief Asia Pacific economist with Natixis SA. “But one more year without cross-border mobility—and related supply chain disruptions — might push us there.”