Omicron macro impact becoming more visible

We describe some of the implications of the Omicron spread for our base case. In broad terms, we expect to make downgrades to our near-term growth forecasts, but to make only modest adjustments to our annual forecasts, with the post-pandemic recovery delayed rather than derailed. For inflation, while Omicron poses both upside and downside risks to the outlook, on balance we continue to see risks to inflation as tilted to the upside.

Omicron is denting near-term growth, and spurring upside inflation risks

The omicron coronavirus variant has spread with lightening speed over the past month, supplanting Delta as the dominant variant in many countries in a matter of weeks. This has driven a surge in case numbers – to unprecedented levels in the US, UK, France, and others – while putting renewed pressure on public health systems. The silver lining is that the hospitalisation rate looks to be significantly lower than with the Delta and other variants; in Denmark, the risk of hospitalisation is estimated to be around 30% lower compared with Delta, while data in the UK suggests the risk could be as much as 60% lower. As a result, while Omicron’s higher transmissibility and vaccine evasion means we are by no means out of the woods, lockdowns look unlikely for most of the economies we cover (a notable exception is the Netherlands, which was still dealing with the Delta wave when Omicron hit, and with hospital capacity particularly constrained). In light of developments, we are currently reviewing our growth and inflation forecasts. For now, we describe in the below some of the implications of the Omicron spread for our base case. In broad terms, we expect to make downgrades to our near-term growth forecasts, but to make only modest adjustments to our annual forecasts, with the post-pandemic recovery delayed rather than derailed. For inflation, while Omicron poses both upside and downside risks to the outlook, on balance we continue to see risks to inflation as tilted to the upside.

Eurozone: Omicron reduces growth and raises inflation moving in to 2022

The eurozone economy has lost momentum in the final month of 2021 and the start of 2022. High frequency data gauging consumption of services (e.g. Google Mobility data for visits to retail and recreation) dropped in the final weeks of 2021, while the Services sector PMI and consumer sentiment fell in December. The rapid spread of the Omicron variant has resulted in new social distancing measures in a large number of countries, partial lockdowns (e.g. lockdowns for the non-vaccinated) in others, and even a total lockdown in the Netherlands. It seems unlikely that other big eurozone countries will follow the example of the Netherlands, as they have more spare capacity in ICU and news about the impact of Omicron on hospitalisation is less bad than had been feared before. Nevertheless, services sector activity will likely remain depressed in the first few months of 2022. The slowdown in services activity is expected to be largely compensated by growth in industry. Indeed, indictors for activity in the eurozone industrial sector suggest ongoing robust growth in Q4 and Q1, although global supply side disruptions could result in some temporary distortions. All in all, we have reduced our forecast for eurozone GDP growth in 2021Q4 and 2022Q1, to around 0.3-0.4% qoq, down from our earlier forecast of 0.7% in each quarter. As services activity should bounce back when the social distancing measures are relaxed, we have raised our growth estimates for 2022Q3-Q4 somewhat. Meanwhile, we have raised our forecast for inflation in the first half of 2022, mainly because we expect the rise in global goods prices to be more persistent that we had estimated before. Still inflation should decline sharply in the second half of this year and fall to below the ECB target of 2% in the final months of 2022.

US: No lockdowns, but consumer caution will dampen services growth

The Omicron wave has driven a record daily rise in case numbers to over 1m per day in recent days. Numbers currently hospitalised with covid-19 have also risen sharply again to nearly 100,0000 – already above the peak reached in the Delta wave. The surge in hospitalisations is largely among the unvaccinated, and given the stubbornly lower vaccination rate in the US – around 62% of the population is fully vaccinated, compared with 70% in the EU and UK (and as high as 80% in Spain) – hospitalisations could well top the previous peak of c.120k seen in early 2021. Despite this, there is very little political appetite for lockdowns, with states instead relying on the booster rollout (currently at 35% of the fully vaccinated), mask mandates and advice to work from home as the primary means of suppressing transmission. While pressure on hospitals will continue to build, we do not in our base case expect any economically meaningful restrictions on activity in the US.As such, the impact of Omicron is largely following the Delta playbook so far, with consumers exercising voluntary self-restraint by going out less. This is confirmed by both Google mobility data and OpenTable dining data, suggesting falls of 5-10% in visits to retail and hospitality establishments in recent weeks. The recovery in air travel has also stalled – stuck at around 15% below pre-pandemic levels – although there has not been a noticeable decline in passenger numbers either. Overall, we expect the weakness in services to drive downgrades to our Q4 and Q1 GDP growth forecasts, but upgrades to our growth forecasts further out, as some of the recovery we expected to be taking place now is likely to happen later in our forecast horizon. This should net out to only marginal changes to our annual average growth forecast (currently 4.1% for 2022). In terms of the composition of growth, we expect a delay in the shift in excess goods consumption back to services, and – alongside the risk of further disruptions to global supply chains – this is likely to add to the upside risks to inflation. This will be offset to some degree by the recent fall in commodity prices and weaker services inflation in some categories, but the overall effect on inflation is likely to be upward.