More than a year after the first successful covid-19 vaccine in clinical trials, fear gripped many parts of the world. The Omicron variant of the coronavirus, first publicly identified on November 24, may be able to evade defenses built up by vaccination and infection with COVID-19. The World Health Organization has declared Omicron to pose a “very high” global risk. The head of vaccine maker Moderna Inc. warned that existing shots may struggle against new, highly mutated variants. Faced with the dire prospect of further lockdowns, border closures and nervous consumers, investors are reacting by selling shares in airlines and hotel chains. Oil prices have fallen by about $10 per barrel, a decline that often accompanies an impending recession.
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As we explain this week, it's too early to tell whether Omicron's 35 mutations on its spike protein help make it more transmissible or more lethal than the dominant Delta strain. . As scientists analyze the data in the coming weeks, the epidemiological picture will become clearer. However, the threat of disease waves spreading from country to country has once again gripped the global economy, amplifying existing triple dangers.
The first is that tighter regulation in the rich world hurts growth. Following news of the variant, countries rushed to block travelers from southern Africa, where the variant was first identified, from entering the country. Israel and Japan have completely closed their borders. The UK has imposed new quarantine requirements. The pandemic abruptly ended the era of freewheeling global travel. Restrictions were beginning to ease this year, but over the past week it has become clear that gates are slamming shut far faster than they open.
As Omicron becomes more widespread, restrictions on free movement within the household may also be tightened. Europe had curtailed many domestic activities even before the variant arrived to combat a surge in Delta Air Lines infections. Italy has barred most unvaccinated people from indoor restaurants, Portugal requires a negative test even for vaccinated people to enter bars, and Austria has imposed a total lockdown. The long-awaited recovery of the rich world's huge service industries, from hospitality to conferences, has just been postponed.
A lopsided economy fosters a second danger, a variant of which could increase already high levels of inflation. This risk looms greatest in the United States, where President Joe Biden's excessive fiscal stimulus has overheated the economy and pushed consumer prices up 6.2% year-on-year in October, the highest level in 30 years. became. But inflation is uncomfortably high elsewhere, at 5.3% globally, according to Bloomberg data.
One might think that Omicron would lower inflation by curbing economic activity. In fact, it can do the opposite. Prices are rising in part because consumers are bingeing on goods, disrupting supply chains for everything from Christmas lights to sweatshirts. The cost of shipping containers from factories in Asia to America remains prohibitively high. Reducing overall inflation will require consumers to put their spending back on services such as tourism and dining out. Omicron may delay this. The variant could also trigger further lockdowns in major manufacturing hubs such as Vietnam and Malaysia, worsening supply disruptions. And cautious workers could delay returning to the labor force, pushing up wages.
That may be one reason why Federal Reserve Chairman Jerome Powell signaled on November 30th that he was in favor of monetary tightening. That attitude is correct, but it poses its own dangers. The ripple effects could have a negative impact on emerging economies. Emerging economies tend to experience capital outflows and exchange rate depreciation when the Fed tightens.
Emerging economies have larger foreign exchange reserves and are less reliant on foreign currency debt than they were during the 2013 taper tantrum, when the Fed tried and failed to ease stimulus. However, domestic omicrons must also be addressed. Brazil, Mexico and Russia have already raised interest rates, helping to curb inflation, but growth could slow as a new wave of infections looms. Turkey has done the opposite by cutting interest rates and is facing currency collapse as a result. Many more emerging countries may face unenviable choices.
The final danger and least recognized is the slowdown in China, the world's second-largest economy. Not too long ago, it was a shining example of economic resilience against a pandemic. But the country now faces a vast real estate industry debt crisis, an ideological campaign against private companies, and an unsustainable “zero-corona” policy that isolates the country and imposes strict local lockdowns with each new case. There is. Growth has fallen to around 5%, even as the government considers economic stimulus. Excluding the temporary shock at the start of the pandemic, this is the lowest in nearly 30 years.
If Omicron proves more transmissible than the earlier Delta variant, China's strategy will become more difficult. The strain is highly contagious, forcing China to take tougher measures with each outbreak to eradicate the disease, hurting growth and disrupting supply chains. Omicron could also make it more difficult for China to exit its zero-coronavirus policy. This is because allowing the virus to spread will likely result in larger waves of infection, which could strain the economy and health systems. That's especially true given China's low levels of immunity from the disease and questions about how effective vaccines will be.
A troubling mutation and a worrying few weeks
It's not all dark. The world will never experience a repeat of the spring of 2020, which resulted in an astonishing decline in GDP. Goldman Sachs says people, businesses and governments have adapted to the virus, and the relationship between GDP and movement restrictions is one-third lower than before. Some vaccine makers are hopeful that the latest data will show that today's shots can still prevent the most severe cases. And, if needed, companies and governments will be able to introduce new vaccines and treatments in the coming months of 2022. Still, Omicron, or in the future Pi, Rho, or Sigma, could reduce growth and increase inflation. The world has just received a rude warning that the road to endemic virus status will not be smooth.
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