Is an “omicron recession” looming ?: Virus could have violent impacts on the economy

Is an “omicron recession” looming?
Virus could have a violent impact on the economy

From Stefan Schaaf

How dangerous is the new variant of the coronavirus for the economy and capital markets? If things go bad, Omikron could throw the German economy back “to the beginning of the pandemic,” says chief economist Ulrich Kater. The US economy is much more robust.

Ulrich Kater actually wanted to give an outlook on the economy and capital markets that morning. But suddenly everything is different, there is a big question mark behind the Deka chief economist’s forecasts for 2022. The uncertainty is called Omikron, the latest variant of the coronavirus. “We have to wait until we know enough about the dangers of Omikron,” warns Kater, but at the same time speaks of “new terrible news from the virus front”.

Omicron may or may not be harmless. In the second case, Kater thought about the consequences for the economy and capital markets. If there were renewed large-scale contact restrictions in the next few weeks, the economy would “be thrown back to the beginning of the pandemic”.

Germany could then slide back into recession. In this case, Kater predicts a 1.1 percent drop in German economic output in 2022. In his main scenario, in which Omikron hardly touches the economic recovery, however, he assumes strong growth of 3.7 percent. An “Omikron recession” is clearly a risk scenario that would particularly impact in Germany because of the low vaccination rate.

Year-end standstill instead of year-end rally

The US economy considers Kater to be much more robust, even in the event of serious problems with Omikron. It would then still grow by 2.5 percent instead of 3.9 percent in his main scenario.

For the stock markets, an Omikron risk would be clearly negative in Kater’s assessment. “Instead of the year-end rally, we will then experience a year-end standstill.” Towards the end of the year there was even a threat of “significant price drops”. There could therefore be a correction in prices, but then with a slower recovery than in spring 2020. However: An omicron slump offers investors the “opportunity to build up positions”.

However, the fact that the central banks tighten monetary policy less quickly than previously expected could also have a supportive effect on the stock markets – or the tightening programs would even be stopped immediately. According to Kater, the interest rate level would then remain at the current level. However, yields on the bond market have already fallen recently. Ten-year federal bonds are currently yielding minus 0.35 percent, at the beginning of the month it was still minus 0.11 percent. A sign of declining rate hike fantasies.

Impact is difficult to quantify

US Federal Reserve President Jerome Powell already hinted at less tightening on Monday. “The recent increase in Covid-19 cases and the appearance of the Omikron variant pose downside risks to employment and economic activity and increase uncertainty for inflation,” said the Fed chief. “Greater concern about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and exacerbate disruptions in the supply chain.”

According to Kater, it is currently difficult to quantify what impact an omicron crisis would have on inflation. Should there be another kind of lockdown and production restricted, this would exacerbate the tension in the supply chains. The consequence would be rising prices. At the same time, energy prices have already “shrunk back significantly”. In the case of restrictions on public life and industrial production, this would increase further, as the recent collapse in the oil price already shows.

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