Omicron variant complicates global recovery

The surging omicron variant is complicating the recovery for a world economy that is wracked by supply chain chaos, worker absenteeism and faltering assembly lines.

Supermarkets are struggling to stock shelves due to staff shortages. The manufacturers are facing a lot of disruption and shipping lines are backed up. At the same time, surging energy prices are adding to inflation, causing central banks to raise interest rates even as the recovery slows.

Optimists argue that the economic hit from Omicron will be limited as vaccines and boosters allow the disease to shift from an acute phase to an endemic one. The U.S. Treasury Secretary Janet Yellen said she doesn't believe that the variant will derail the U.S. recovery.

The analysis by Nomura of the impact of omicrons on nations hit early like the U.K. and Canada shows shorter duration waves, faster descents from peaks and lower death rates than the delta variant. That means the psychological fear factor could fade and demand for services would be unleashed.

As the pandemic continues into its third year, it is becoming clearer that a return to economic normality is some way off the table. The global economy is split between the countries that are living with the virus and China's dogged pursuit of COVID zero. According to economists at Citigroup Inc., the crosscurrents present an unusual combination of challenges that could be baked into the longer-term outlook. Their counterparts at JPMorgan Chase Co. say global growth is now downshifting because of the omicron drag.

The World Bank has already lowered its growth outlook and International Monetary Fund Managing Director Kristalina Georgieva predicted a difficult year for policymakers, saying 2022 will be like navigating an obstacle course. The IMF will release new forecasts in the coming days.

There is a risk of underestimating the economic impact of the surge in omicron cases, said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.

While it seems that the economic consequences would be milder and focused on the first quarter, it is still too early to say that cases are skyrocketing in many parts of the world. The surge in infection comes as inflation pressures are forcing central banks to raise interest rates, led by the U.S. Federal Reserve. In a meeting of the Federal Open Market Committee this week, the U.S. central bank is expected to signal plans to raise interest rates in March for the first time since 2018.

South Korea has raised rates this month, its third hike since the summer, and emerging economies are also tightening. China is the exception, cutting rates to protect the economy from a property slump and slowing domestic growth.

The disruption is real for many economies.

From Australia to the U.K. food supply chains for supermarkets are being disrupted, and prices have gone up due to poor weather, labor shortages and energy costs. Airline travel is plagued by travel restrictions and staff shortages, with thousands of flights grounded around the world.

The heavy industry is also being squeezed. Toyota Motor Corp.'s shares fell on Friday after the automaker announced expanded production halts on rising COVID 19 cases and an ongoing chip shortage that affects its suppliers and operations in Japan.

In Europe, car sales fell for a sixth month in December, highlighting the uphill battle that its automakers face. The pandemic continues to weigh on consumer confidence, and sourcing enough semiconductors is arduous this year.

In China, where much of the world's industrial components and consumer goods are produced shipping containers are stacked up at the already backed-up Shenzhen port, as congestion in the U.S. and Europe ricochets back to Asia. There are delivery delays that weigh on growth and add costs.

While China s aggressive measures to suppress the disease have allowed factories to power through the epidemic, omicrons spread will make that approach even more difficult. Automaker Volkswagen AG, including global manufacturers in China, reported disruptions due to lock downs and other restrictions.

Global shipping companies are trying to meet the demand of consumers and businesses despite logistical constraints, such as port congestion, rail backups and trucker shortages. Matson Inc., a Honolulu-based container carrier, said last week that they expect these conditions to remain largely in place through at least the October peak season and expect increased demand for our China service for most of the year. Hong Kong-based Willy Lin, whose company Milo s Knitwear International Ltd. makes high-end sweaters from its factory in Dongguan for clients in Europe, is stocking up on key material to meet future orders as supply snarls continue.

Lin, who is also chairman of The Hong Kong Shippers Council, said if you want to place orders you must do it now. The veteran industry player is cautiously optimistic for a quick return to normal.

"I am surprised that people still think these problems will go away soon," Lin said.