If not arrested, Omicron could make inflation the biggest spoiler for the global economy

Omicron Virus and Its impact on world economy If the Omicron cases continue to rise over the next 3-4 months, we are staring at very difficult times. The whole idea of policy normalisation, sucking out excess liquidity to control inflation could go for a toss

The world will be entering into the third year of the Covid-19 pandemic as we step into 2022 and fear is already looming of yet another blow to both the lives and livelihood of the people. The latest variant Omicron that has emerged from South Africa has been declared as a variant of concern, given its high transmissibility.

Are we staring at yet another disruption with lockdowns and economic activities coming to a halt?

According to the latest estimates by Bloomberg, the global economy has been expanding at just 0.7 per cent in the final three months of the year, which is half the pace of the previous quarter and below the rate of around 1 per cent seen just before the crisiserupted.

This is a worrisome sign as in the pre-pandemic times, many nations were already facing slowdowns. In order to achieve a higher growth rate only to slide below the pre-pandemic levelslater, is not a very happy scenario for the global economy.

The Euro-area is on pace for a 0.8 per cent expansion in the fourth quarter from the previous three months, which is 0.3 percentage point less than what was projected in November, this report further said. Japan is expected to expand lower by 0.1 percentage points at 0.9 per cent. This indicates that many developed economies are expected to report lower growth in the fourth quarter. Meanwhile, US, UK and Canada are seen to expand higher by 0.1 per cent, 0.4 per cent and 0.2 per cent respectively from current pace of 1.2 per cent, 0.7 per cent and 1.4 per cent.

The impact of Omicron is now being felt severely in the UK and other European countries. The ripples are also being seen in the US too, which has reported its first death from the Omicron this week while 73 per cent of the new cases have been caused by the new variant.

The emerging markets are also expected to report slowdown as the blow from the virus picks up pace. The Bloomberg report estimated China, Brazil, Russia and South Africa would report lower growth for the December quarter.

India has been able to manage the spread of the virus for many months now with lower test positivity rates as well as active cases. However, the alarm bells are being rung now by the Centre and states with several new guidelines being issued by the latteras we head to the new year, thanks to Omicron.

Night curfews and restrictions are now back in many states. New travel guidelines are in place and it is being said that the contact intensive sectors like aviation, travel and tourism and restaurants could see another push back.

In any noticeable recovery is to happen, Indian consumption story must take the lead. Government spending can only provide so much and prolong the relief but cannot sustain growth perpetuallywithout things returning back to normalcy.

Government’s estimates suggest that India will end the financial year with a double digit growth. Unlike, the developed countries where the financial year is between January and December, India follows an April-March cycle.

But, on the back of the latest variant, many agencies have again revised the growth estimates, downwards. Fitch, for instance, has revised its growth estimates to 8.4 per cent from an earlier 8.7 per cent. Though the forecasts for FY23 have been increased from 10 per cent to 10.3 per cent.

Meanwhile, Moody’s Investor Services pegged the growth at 9.3 per cent while SBI research report sees India grow at 9.5 per cent for FY22. But, the estimates were made 3-4 weeks ago and Omicron was not spoken off in same breadth.

Estimation of a Gross Domestic Product (GDP) is a dynamic process and rating agencies and global institutions like the International Monetary Fund (IMF) keep revising it from time-to-time.

While, the Omicron variant is perceived to be less deadly and with vaccinations in place in developed economies and even in India going, strongly, the mood is not of doom but of caution. India must contain the spread if the impact is to be reduced.

During the course of previous two waves, Central banks and governments across the world flushed the system with liquidity, and which has helped us sail through. It has also been a period of low inflation and low interest rate regime. The problem, this time,is different.

The inflation has been on the rise and we have been hearing many central banks suggesting of sucking some liquidity from the system to control it. The US Federal Reserve has said that it will be more aggressivein tapering bond buying and is aiming at ending the purchase by end of March 2022 from an earlier deadline of the end of June to soften the blow of rising inflation. It has also indicated that it will be raising interest rates at least thrice over the next year.

Bond buying is an emergency measure that began last year, with an intention to bring down longer-term interest ratesand to encourage higher borrowing and spending. The near zero interest rate influences borrowing costs such as for mortgages and credit cards.

In the Indian context, where the Reserve Bank of India (RBI) is taking a similar view on the inflation front, Governor Shaktikanta Das has also indicated that the Central Bank will be employing means to suck access liquidity from the system. It has also expressed concerns over the inflation.

Even in December Monetary Policy announcements, the RBI Governor had reiterated his concerns on the inflation front while keeping the policy rates (repo rate and reverse repo rate) unchanged. He has said that the RBI will keep its stance accommodative for as long as necessary.

The retail inflation has been in control and within the comforts of the RBI (4+/-2) but the Wholesale Price Inflation has been in the double digits for 8 months in a row in November.

But, if the Omicron cases continue to rise over the next 3-4 months, we are staring at very difficult times. The whole idea of policy normalisation, sucking out excess liquidity to control inflation could go for a toss.

The time is to wait and watch.

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