Omicron, threat to global economy – OECD

The Paris-based Organization for Economic Cooperation and Development (OECD) warned that the COVID-19 Omicron variant threatens the global economic recovery as it lowered the growth forecast for 2021 and appealed for a swifter rollout of Covid vaccines.

The OECD said the recovery has “lost momentum” as it cut the outlook of top economies including the United States, China and Europe.

According to OECD’s updated economic outlook, the economy is now expected to expand by 5.6% this year, down from an earlier forecast of 5.7%, with a warning that low vaccination areas could create “breeding grounds” for deadlier virus mutations.

Its 2022 forecast remains unchanged at 4.5%, with the report released only days after Omicron was detected.

OECD chief economist Laurence Boone said, “We are concerned that the new variant of the virus, the Omicron strain, is further adding to the already high levels of uncertainty and risks, and that could be a threat to the recovery.”

While the OECD said it was “cautiously optimistic” about the recovery, it warned that health, high inflation, supply chain bottlenecks and potential policy missteps are “all key concerns.”

“The top policy priority remains the need to ensure that vaccines are produced and deployed as quickly as possible throughout the world including booster doses,” the OECD said.

“The recovery will remain precarious and uncertain in all countries until this is achieved.”

In the “more benign scenarios,” outbreaks could continue to prompt restrictions on people’s movements, which could have long-lasting consequences on labor markets, production capacity and prices.

“The harshest scenario is that pockets of low vaccination end up as breeding grounds for deadlier strains of the virus, which go on to damage lives and livelihoods,” Boone warned in an editorial in the report.

Developed countries of the Group of 20 wealthy and emerging nations spent $10 trillion to prop up their economies during the pandemic while vaccinating the planet would cost only $50 billion, Boone told reporters.

“It would be a big mistake to believe the job has been or is almost done,” she said. “The news about the Omicron variant may actually be a reminder how short-sighted that failure has been. We are spending to support our economies when we are failing to vaccinate the whole world.”

Analysts at Oxford Economics say Omicron could shave 0.25 percentage points off global growth next year if it causes mild effects, but it would cost 2 percentage points if it is more dangerous and a large part of the global population was forced into lockdowns.

The World Health Organization believes the variant’s high number of mutations might make it more transmissible or resistant to vaccines.

The OECD expects inflation to peak at the turn of the year before receding gradually in the 38-nation OECD.

Soaring inflation has roiled markets as investors fear that central banks will raise interest rates sooner than expected to tame runaway prices.

The OECD urged monetary policymakers to “communicate clearly” about how far they will tolerate inflation exceeding their targets.

US Federal Reserve chief Jerome Powell, who previously insisted that high inflation was only “transitory,” said that price increases could last longer than anticipated — suggesting the central bank could lift rates sooner than expected.

The OECD said supply side constraints and shortages “should wane gradually through 2022-2023” as demand normalizes, production capacity grows and more people return to the labor force.

The organization also highlighted “marked differences” in the recovery of countries around the world.