Moody’s rings the bell for the Omicron variant, in markets and economy

Her Eleftherias Kourtali

The emergence of the Omicron variant poses a new threat to global economic growth, markets, and inflation prospects, as health risk concerns intensify and several countries have imposed new travel restrictions in recent days, Moody’s warns in a new report. These limitations, he estimates, are likely to increase in the coming weeks, until scientists learn more about the variant.

Omicron’s appearance underscores Moody’s view that the COVID-19 pandemic remains a threat to health, as well as a major source of uncertainty for the global economy and a factor in financial market instability. “Right now, we are keeping our macroeconomic forecasts because the variational information and policy action taken to date does not yet support a significant change in estimates, which was based on the expectation that the virus will gradually become endemic and exit. “from the pandemic it will be abnormal and unpredictable”, the house emphasizes, opening a “window” for possible degradations in the near future when the danger of Omicron and its consequences are clarified and a negative scenario is implemented.

The size of the threat will depend on the contagion and infectivity of the new variant, the house emphasizes. As many countries moved in apparent normalcy after the pandemic, this variant has caused new uncertainty. However, experience with the emergence of other variants, in particular the Delta variant, and public health policies to address successive waves of infections provide a basis for determining the factors that will determine the economic and credit impact of Omicron, Moody’s.

Omicron appears to have been identified early, which increases the ability of policymakers to take steps to slow its spread. It is not yet known whether this variant is more contagious or more severe than other strains of the virus or to what extent existing vaccines and treatments provide protection against a serious illness. However, continued progress in global vaccination efforts and public compliance with tools such as masks and social distance will be important factors in determining the economic impact of the new variant. Countries with a guaranteed supply of effective vaccines and high levels of vaccine acceptance by the public will remain in a better position, the house emphasizes.

The characteristics of the virus will also shape the policy and “response” of the private sector. If officials eventually determine that Omicron poses a high risk to public health and if the variant proves difficult to limit with border restrictions – similar to the spread of the Delta variant – policymakers in many countries are likely to impose renewed restrictions. The severity of the restrictions will vary depending on factors such as the specific state of public health in each country, public support for the restrictions and the willingness of the authorities to bear the economic and political costs associated with the restrictions.

The emergence of the new variant also comes at a time of fragile economic recovery, with supply chain problems, rising inflation and labor market shortages, according to Moody’s. The shutdown resulting from the spread of the new variant could prevent the supply chain pressures from easing, reducing capacity and fueling further cost pressures in areas exposed to global supply chains. On the demand side, the fear of infection could prevent a large percentage of people from engaging in activities that require close contact. Thus, the demand for services ranging from hospitality to travel could be reduced, at a time when holiday-related expenses were usually rising.

In addition, the house states, business plans for a gradual return to normalcy after the pandemic are now uncertain. Until there is more clarity about the overall state of the pandemic, fears of COVID-19 and new restrictions on international travel will continue to limit the supply of labor.

Economies vary in their ability to withstand another wave of infection, the report said. Should the new variant lead to another growing wave of cases, the economies most affected will be those with lower vaccination rates, greater dependence on tourism and lower capacity to provide additional fiscal and monetary policy support to offset the impact on growth. If the variant affects the risk appetite in the markets, would cause further financial stress to securities issuers with high financial needs. For example, emerging market countries that rely on international lending markets may face increased refinancing risks.

Developed economies, aided by effective vaccines, high vaccination rates and extensive policy support in the private sector, are better able to meet the challenges posed by the new variant than emerging market countries. But Vaccine reluctance remains an obstacle to recovery in many countries, including many developed economies, Moody’s concludes.