Amid omicron scare, OECD cuts global economic outlook

Calling for swifter vaccinations, the OECD warns sluggish growth could be further derailed by the new COVID-19 variant.

The OECD said the momentum from the strong rebound after reopening was now easing in many countries.

The global recovery has lost momentum and is becoming increasingly uneven, the Organization for Economic Cooperation and Development (OECD) said in its latest economic outlook on November 1, adding that the emergence of the omicron variant could threaten recovery. The 38-member body now expects global output to grow by 5.6 per cent this year, down 0.1 percentage point from its September outlook. It maintained its forecast of 4.5 per cent growth in 2022, however.

"We are concerned that the new variant of the virus, the omicron strain, is further adding to the already high levels of uncertainty and risks, and that could be a threat to the recovery," OECD Chief Economist Laurence Boone told reporters. Boone called on policymakers to ensure that COVID-19 vaccines are produced and deployed swiftly throughout the world, including booster doses, while stressing that logistics remained the biggest roadblock in the global vaccination drive.

Omicron risks

The emergence of the omicron variant coincides with global economic recovery losing some of its steam thanks to global supply chain disruptions, soaring consumer prices and rising cases of COVID-19, especially in Europe. While experts have mostly refrained from judging the economic implications of the new variant, governments have been swiftly reimposing travel restrictions in an effort to keep the virus at bay, threatening global recovery.

"In terms of forecasting, this [omicron] aggravates the risks we have already identified, whether it be tensions in supply chains, closed borders, health checks being reinforced," Boone said. "There could be two scenarios: One is that this is a variant like we have seen since the beginning of the pandemic. It's going to be a tough winter. It pushes back the recovery but does not disrupt it. We will see more supply tensions and worsening global imbalances," she said. "Then there is another scenario that it's worse and we will have to protect ourselves much better. In that case, demand could be hurt, but that could also bring down price pressure."

Analysts at Oxford Economics said earlier this week if omicron became the dominant strain, it could shave off more than 2 percentage points from global output growth next year.

Uneven growth

The OECD outlook flagged "marked differences" in the recovery across countries. While it projects most advanced economies to return to their pre-pandemic output path by 2023, many emerging economies and lower-income economies are expected to see "sizeable long-term income scars from the crisis." The recovery in advanced countries has been supported by prompt and massive fiscal and monetary policies that saw trillions of dollars pumped into those economies, and swifter rollout of effective COVID vaccines. Other economies, meanwhile, didn't have enough policy space and most of them are still struggling to access vaccines.

Inflation worries

The Paris-based OECD, which counts the U.S., Britain, Germany and Japan among its members, said it expects inflation to peak by the end of the year before moderating to around 3.5 per cent by the end of 2022 in the OECD economies. Rising inflation, caused in part by strong post-pandemic demand, supply chain bottlenecks and higher energy costs, has spooked global investors who fear that central banks would be forced to prematurely raise interest rates to tame soaring prices.

"Our analysis suggests that as the health situation improves, demand stabilizes and people return to the labor force, supply bottlenecks should fade," Boone said. "In current circumstances, the best thing central banks can do is to wait for supply tensions to diminish and signal they will act if necessary."