The latest Coronavirus variant, Omicron, which is believed to be more transmissible and severe, might derail growth and recovery and raise costs, according to the Organization for Economic Co-operation and Development (OECD).
The Paris-based international organization warned that monetary policymakers should be “cautious”, and global authorities should hasten the deployment of COVID -19 vaccines. Laurence Boone, chief economist of the OECD, told the Financial Times that the Omicron variant was “adding to the already high level of uncertainty and that could be a threat to the recovery, delaying a return to normality or something even worse”.
The warnings were given with the twice-yearly economic outlook data that OECD releases. The outlook is; inflation will go up in 2022 across the G20. The last prediction was 3.9 percent in September, which has been raised to 4.4 percent now. The largest increases were in the US and UK, where inflation forecasts for next year rose in both countries from 3.1 per cent to 4.4 percent.
Uncertainty around inflation worries investors
Jay Powell, chair of the US Federal Reserve and the Bank of England, have warned of inflationary trends in the US and UK. Both recommend a tighter monetary policy.
“There is no one-size-fits-all [monetary] policy because you have a very different situation in some emerging market economies with high inflation rates. The US is also different from Europe and also different from Asia where there’s much less of an inflation issue,” Boone said.
If the new variant spreads fast and is severe enough, countries might consider lockdowns and travel restrictions, which are bound to affect an already beleaguered supply chain. This is bound to affect prices and cause inflation.
According to the Fitch Ratings wire, “Recent increases in inflation will complicate any policy response to Omicron, which could have an inflationary effect if new lockdowns or voluntary social distancing constrain labor supply recoveries or exacerbate global supply-chain shortages and bottlenecks. Hence, we believe central banks could be wary of delaying the normalization of monetary policy settings in response.”
Boon stressed that governments and policy makers need to clarify that interest rates would not go up as a result of supply shortages. The OECD noted that the global recovery had been much stronger than it initially expected in 2021, but there were still some imbalances. “Supply shortages risk slowing growth and prolonging elevated inflation,” Boone said.
The supply constraints in the automotive industry have affected some European countries like Germany, where the economic losses were nearly 1.5 percent this year. Mexico, the Czech Republic and Japan have reported a loss of 0.5 percent in their economic growth.
More risks to global growth
Other reasons for the imbalances in the economic growth across the world are the uneven supply of vaccines; a growing gap in economic performance between advanced economies and emerging markets; and a divide between the labor market performance of European countries and the US.
In Europe, employment is better protected and higher than pre-pandemic levels, but economic output had not fully recovered lost ground. In the US, economic output is positive but there is a dearth of people to run the show.
The OECD’s economic forecast is the world economic growth slowing from 5.5 percent this year to 4.5 percent in 2022, followed by a 3.2 percent expansion in 2023. Inflation in G20 countries was likely to fall to 3.8 percent in 2023 after hitting 4.4 percent next year. However, the OECD forecast that inflation would be below 2 percent in the eurozone in 2023, vs 2.4 percent in the UK and 2.5 percent in the US.
