The threat of the new COVID variant Omicron is looming over the world and economists are sharpening their knives to cut growth forecasts.
It's too early to judge the health implications. There is no evidence yet on whether Omicron is more transmissible, has more severe symptoms or whether existing vaccines will work or not.
We don't know that. We know that governments are already reacting to Omicron by bringing back restrictions on foreign travel. The path to normalcy will continue to be bumpy and uncertain, according to Ben May and Innes McFee of Oxford Economics.
The omicron variant of COVID -- 19, first detected in South Africa on November 8, has now spread to at least two dozen countries from the U.S. to South Korea and the world.
On Monday, the World Health Organization said the global risk of Omicron is very high. Professor Anne von Gottberg said that previous infections used to protect against Delta but now with Omicron that doesn't seem to be the case.
A top scientific adviser in France said Omicron could become the dominant variant of COVID 19 in that country by the end of January.
Markets are nervous. After the ugly sell-off on Black Friday, stocks have seen-sawed between red and green. They started to bounce back, but fell after the first U.S. case was confirmed.
It was the worst back-to-back sell-off we've had since October 2020 and it may not be over, said Ipek Ozkardeskaya, senior analyst at Swissquote.
The U.S. futures were edging up again this morning.
Oxford believes that Omicron could be a blessing in disguise. If vaccine efficacy holds up and symptoms are less serious, the economists argue that it could speed up the transition back to normalcy and any curtailment of economic activity from renewed restrictions could be made early in the new year.
Oxford said that people would be reassured that even though the virus is still around its economic impact will lessen.
May and McFee said that although we can't discount the possibility that Omicron will have greater transmissibility, similar or worse symptoms to Delta, and will be more resistant to vaccines.
They said that if that happens, more restrictions will be imposed, which will cause more disruption to supply chains, economic growth will slow and financial markets will weaken. With fiscal policy already stretched and monetary policy loose, advanced economies won't have much firepower to fight a new downturn.
Under this scenario, global growth slows to 2.3%, with the US and eurozone economies falling 2 percentage points from its baseline forecast of 4.5% and 4.2% in 2022, according to Oxford.
The growth in the world is reduced to 75 - 80% of its current forecast because of tighter restrictions, more supply-chain disruption and more cautious behaviour by households and firms. They think this can be made up in the second half of 2022.
How will policy makers respond if Omicron has a significant impact on the economy? Oxford points out that market pricing of policy rates has already shifted lower because central banks are likely to pull back on hawkish signals.
It is a stretch to imagine that advanced economy central banks would tighten policy at the same time as governments are ramping up restrictions on activity.