The Omicron variant of COVID-19 has the potential to push a world that is limping out of the damage caused by the Delta variant back into turmoil. Omicron was first reported in South Africa on 24 November, and subsequently the World Health Organization warned that the new variant was spreading faster than the Delta variant not only in South Africa, where the incidence of Delta is relatively lower, but also in countries such as the United Kingdom (UK), where the incidence of Delta is higher. Omicron has the potential to become the dominant variant in multiple European countries, including the UK, over the course of this week.
There is speculation regarding the emergence and spread of the mutation in South Africa. A prominent hypothesis is that the new variant evolved in the body of an immuno-compromised HIV patient. With vaccination rates still quite low in many emerging market economies, it is hard to know.
COVID-19 could have acquired higher transmissibility thanks to mutations that are in line with the progression from a pandemic to an endemic virus. This could mean that COVID-19 might be less virulent/lethal going forward, with roughly constant levels of infection and without major flareups. We may have to live with COVID-19 in the future, as we do with the current flu viral strains, but we will still have to closely monitor virus mutations, their virulence and immunity levels in the population.
It is important to note that data about the clinical severity of, and the vaccine efficacy against, Omicron is rapidly evolving but still limited. This means the next few weeks will be crucial in terms of giving us a better idea about Omicron’s virulence and transmissibility. There will be media noise around the spread of the variant based on anecdotal experiences, which makes it imperative to focus on large, controlled data sets that separate signal from noise.
Even so, unlike the start of the pandemic, our healthcare systems ae better prepared to counter any new spread, be it in terms of the availability of COVID-19 self-tests, potential booster doses or our understanding of the science behind the virus’s spread. This means pharmaceutical companies will likely get quicker approval from the US Food and Drug Administration for the development and launch of new types of vaccines or booster dosages against the new variant.
Pfizer, for example, released study results that claim that its new anti-viral pill, Paxlovid, could cut the risk of hospitalization or death for patients at high risk of severe COVID-19 by 89% when patients are treated within three days following the appearance of symptoms. Similarly, over the next few weeks, drug companies will likely be releasing new data around the efficacy and durability of the current vaccines vis à vis Omicron, along with studies that have stress-tested different strains of the virus.
From a production perspective, assuming the logistics are in place, vaccines could be now rolled out globally at the rate of 1.0 to 1.5 billion doses per month for most of the strains. Eventually, we could be moving toward a situation where we might have to vaccinate against a new strain while herd immunity continues to build globally.
The emergence of Omicron will undoubtedly have some negative economic impact in the short term. However, it is occurring too late in the year for it to noticeably impact 2021 annual growth. It will also occur early enough in 2022 that there will be ample time for a compensatory bounce back after the likely hit to growth in Q1. For the time being, we have left our 2022 US growth forecast unchanged at 4.4%. However, we have trimmed our eurozone forecast by two tenths to 4.4%, although that is only tangentially due to Omicron.
The global growth forecast remains unchanged as well, at 4.6%, although we see some downside risks, primarily around China and emerging markets. Our 5.0% expectation for China’s 2022 growth is starting to look a bit generous, even with the recent easing policy bias.
More than Omicron, we are concerned about the massive hawkish tilt in the stance of developed market central banks this month. There is a high likelihood that the removal of accommodation accelerates and gathers critical mass just as economic growth moderates and inflationary pressures ease notably (in the latter part of 2022). With reduced excess savings, less support from inventory rebuilding, a slowdown in hiring (due to lack of workers) and softening housing demand, it would not take much to tip the US economy into a shallow technical recession in early 2023, regardless of Omicron.
Omicron has the potential to exacerbate the current cyclical dynamics that are at play. If the number of cases were to dramatically rise, amplifying the supply and demand dynamics that have developed over the last year, we could be staring at a higher or more persistent inflationary regime, which could push the Fed to an even more hawkish stance. This would amplify the anticipated deceleration in growth. Implications could include short-term rates moving higher and long-term rates moving lower, which suggest the possibility of a yield-curve inversion and a recessionary scenario where risk assets would tend to fare poorly (Figure 1).
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