The three possible scenarios in the bags before the Ómicron variant
Despite the fact that "it would be premature to assume that a major economic correction will take place", the Omicron variant has already put countries, governments, experts, economists and investors on alert. What will this new strain of Covid-19 bring to the markets? These are the three possible scenarios facing the economy, according to analysts at Oxford Economics.
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How to operate in the stock market in the face of the panic over Ómicron, the new variant of the Covid?If Omicron becomes the dominant variant, causing more severe side effects and reducing the efficacy of vaccines, "our current negative scenario becomes the most plausible worst case, with global GDP growth slowing to 2.3 % in 2022, well below our current baseline forecast of 4.5%, they point out in a report.As the analysts explain, since it will be a few weeks before we get more information about the characteristics of the new variant, they have developed three alternative scenarios.
In the first scenario, concerns about the new variant become excessive and fear and restrictions quickly dissipate without leaving any visible economic impact. In this scenario, GDP grows around 4.6% in 2022.
In another scenario, they assume that the combination of virus fears, restrictions and persistent supply constraints lead to cooler consumer spending. Service-sector activities, such as leisure, hospitality and travel, are hit harder, weighing 1 annualized percentage point on GDP growth in the first quarter. Here they forecast that part of the lost activity will recover in spring and summer, thus raising GDP growth in the second and third quarters. In this scenario, the economy grows by 4.4% in 2022.
In its severe negative scenario, a surge in infections, hospitalizations and deaths leads to lingering fear of the virus and the reimposition of strict restrictions. Limited room for additional fiscal and monetary policy stimulus and a sharp tightening of financial conditions deal a more significant blow to the US economy, with GDP growth falling below 2% in 2022.
INFLATION AND STIMULI
On the other hand, from Oxford Economics they point out that there continues to be a high degree of uncertainty around the inflation outlook and the new Ómicron variant will fuel that uncertainty. On the one hand, the Delta variant showed how inflation dynamics have remained procyclical with lower price pressures in sectors where activity cools. As such, weaker demand for goods and commodities could be disinflationary, especially if exacerbated by financial markets. Still, "we also know that if demand for goods remains strong and the Ó variant
micron leads to exacerbated supply chain and labor supply constraints, these could prove inflationary."
They also consider that a key determinant of the economic and inflation impact of a new variant of Covid would be the political response. “We believe that lawmakers would resist the temptation to pass further stimulus measures unless the Covid-19 situation deteriorates to a significant degree. On the US Federal Reserve (Fed) front, the Omicron variant will impart a moderate tilt. to politics, "but we don't expect a major change of course without a severe deterioration in the economic outlook," they say.