'A temporary interruption': Economy could take slight hit from omicron variant in 2022, experts say

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The omicron coronavirus variant could have a moderate impact on the U.S. economy next year as it hurts consumer spending and worsens labor shortages and supply chain bottlenecks, intensifying already-high inflation, top economists say.

It’s too early to pinpoint how omicron will affect economic growth because scientists are just starting to assess the toll it could take on global health. It could be a nonfactor or, at worst, nudge the U.S. back into recession

But under one likely middle-ground scenario laid out by some top economists, the strain could be more infectious but not significantly more virulent than the delta variant. And it could lead to fewer government-imposed restrictions on businesses.

If that’s the case, omicron – or another similar variant – would cut economic growth next year by half a percentage point to 4.3% and lead to the creation of several hundred thousand fewer jobs, estimates Mark Zandi, chief economist of Moody’s Analytics.

That would be less than Moody’s projected growth of 5.5% this year – highest since the early 1980s – but still a historically strong figure as the nation continues to dig itself out of the pandemic-induced downturn.

The Dow Jones Industrial Average tumbled 905 points, or 2.5%, on Friday, largely on worries over omicron, but it closed up 236 points Monday before sliding again in mid-morning trading Tuesday.

"The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” Federal Reserve Chair Jerome Powell said in prepared testimony he was scheduled to deliver this morning before the Senate Committee on Banking, Housing, and Urban Affairs.

The variant may reduce the chances that the central bank will accelerate the winding down of its bond-buying stimulus to curtail inflation at a mid-December , says Tom Porcelli, chief economist of RBC Capital Markets.

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Two weeks to judge omicron's impact

Omicron was first discovered in South Africa last week, and Dr. Anthony Fauci, President Joe Biden’s chief medical adviser, said it would take about two weeks to get more definitive information on how easily it will spread, whether it causes more severe illness and how well vaccines protect against it.

But preliminary reports suggest that while omicron spreads more rapidly than delta, it may lead to less severe disease, says Ian Shepherdson, chief economist of Pantheon Macroeconomics.

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South African officials say about 90% of new cases in Gauteng province are caused by omicron, underscoring that the variant is easily transmissible. At the same time, the officials say, existing cases have been mild, though they’ve mostly been among young adults rather than more vulnerable older people, Shepherdson says.

Shepherdson also notes that Pfizer has said its new COVID-19 drug treatment, Paxlovid, is probably effective against a wide range of variants.

“If it is equally effective against Omicron, and production can be ramped up quickly … then Omicron will at worst trigger only a temporary interruption to the economic recovery, and markets will rebound,” Shepherdson wrote in a note to clients.

A new variant of the coronavirus known as omicron has emerged in South Africa, though its impact on COVID-19 vaccines may not be known for weeks.
A new variant of the coronavirus known as omicron has emerged in South Africa, though its impact on COVID-19 vaccines may not be known for weeks.

And even in his likeliest “downside scenario,” Goldman Sachs economist Daan Struyven assumes omicron “evades immunity against hospitalizations only slightly more than delta.”

New lockdowns seem unlikely

Meanwhile, the U.S. has become more adept at dealing with new variants as vaccination rates increase and Americans rely on strategies such as mask wearing and social distancing, rather than lockdowns, to minimize infections. About 80% of Americans over 12 have been fully vaccinated, according to the Centers for Disease Control and Prevention.

“We are broadly assuming that there will be new waves of infections but that each wave will be less disruptive to the health care system and economy than the previous one,” Zandi says.

“New lockdowns are unlikely, except in the worst-case scenario,” Shepherdson says.

Under Zandi’s most likely scenario, omicron or another variant will cause coronavirus infections to peak at 175,000 new cases a day – similar to delta and up from about 75,000 today – but result in fewer hospitalizations and deaths. As a result, he expects it to shave growth by a half percentage point in 2022, compared with the 1.2 percentage point delta-triggered drop in growth this year.

Goldman Sachs’ Struyven similarly estimates global economic growth could be cut by 0.4 percentage points to 4.2% in 2022.

Here’s why the U.S. economy could take a hit:

Consumer spending

Outlays may slow as household once again visit restaurants and stores less frequently and cut back on travel.

Worker shortages

The labor deficit could worsen as employees continue to stay on the sidelines out of fears of catching the variant or to care for children who are distance-learning from home.

Supply chain snags

The bottlenecks, which already have hindered product deliveries, could intensify as it becomes even tougher to hire truck drivers, along with warehouse and dock workers.

Inflation

The worker shortages and supply snarls could keep consumer prices higher. While Zandi expects the annual increase in the consumer price index to fall from a 31-year high of 6.2% in October, a new variant could keep inflation elevated at 3.75% in 2022, compared with 3.6% otherwise.

Struyven says inflation for services like dining out could fall as consumers stay home more but prices for goods like TVs and computers may spike further, leaving “an ambiguous” impact on inflation.

Trade deficit

Because omicron likely would lead to more lockdowns and economic pain in Europe, the U.S. trade deficit could widen as Americans buy more imports while overseas consumers purchase fewer U.S. exports. A bigger trade gap means less growth.

Of course, economists say omicron could lead to a less likely doomsday scenario if it evades the immunity provided by vaccination and prior infection and results in more severe disease.

“Under those conditions, the next few months would be extremely difficult, with anti-COVID measures being reimposed in order to prevent a meltdown of the health care system,” Shepherdson says. “Spending on consumer services would collapse, payrolls would drop sharply, and the federal government would have to pass emergency measures in order to support people who lose their jobs.”

Goldman, however, also laid out an “upside” scenario in which omicron is slightly more transmissible but causes much less severe disease. That could leave more people immune to COVID-19 while benefiting global health and the economy.

Contributing: Maureen Groppe

This article originally appeared on USA TODAY: Omicron variant: Economy could take moderate hit from COVID variant

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