The advent of the omicron variant means renewed uncertainty in terms of the economic outlook. Emerging countries still risk being the hardest hit. Global inflation will probably be kept at bay. But current market buoyancy looks increasingly fragile – beware of dislocations. The global economy can not be unscathed by inflation threats in US and slowing growth in China. Vaccine resistance has both health and political fall-out. Despite a disappointing outcome, private sector engagement and escalating activism mean post Glasgow will be different. 
  • Omicron has abruptly exacerbated the concerns of last month when growth estimates were being revised downwards. The new variant throws a wrench in the recovery by making the global economy more uncertain and growth prospects weaker. The pandemic will drag on longer, imposing yet another set of restrictions and further stress on the most exposed industries (aviation, leisure, and hospitality).
  • The new variant will inflict still more pain on emerging markets and developing countries. The reasons are as follows: (1) they suffer from lower vaccination rates than rich countries, which is already delaying their economic recovery; (2) fiscal emergency measures are no longer an option, for risk of having to contend with much higher interest rates or weaker currencies (which fuels inflation); (3) to varying extents their economies depend (sometimes exclusively) on tourism revenues which are once again drying up.
  • The threat of inflation looms over the global economic recovery and Omicron is likely to make it worse by intensifying supply chain disruptions and goods inflation. Yet, four observations should temper concerns about entrenched global inflation. (1) Market participants display confidence that the inflation beast will be reined in. On 24 November, 5-Y-5-Y forward inflation expectation rates stood at a mere 2.19%. (2) Inflation remains country-dependent: it is the highest in the US (6.2% Y-o-Y), slightly more moderate in the Eurozone (4.9% Y-o-Y), and non-existent in the Asia-Pacific region. (3) There is no widespread evidence yet of a wage-price spiral. (4) Most importantly, central banks will raise rates as required. Powell said as much when he announced on 30 November that the Fed will speed up its tapering.
  • Just before Omicron struck, market analysts were very sanguine about 2022. Their reasons are twofold: (1) The global economy will likely grow at 4%, spurred by a rebound in consumption supported by high saving rates and low unemployment. (2) Earning upgrades: listed, large companies benefit asymmetrically from the pandemic which tends to crush unlisted, smaller ones (hence, what is good for the market is bad for the economy). However, the situation is fragile, and it wouldn’t take much to send the markets into turmoil.
  • Currently, the global economy is stuck between the rock of US upcoming tighter monetary policy and the hard place of China’s decelerating growth. Together, the two giants account for 40% of global GDP (at market exchange rates), so their economic fate cannot fail to have global repercussions, entail cascading effects, and test the market’s sanguine outlook.
  • It will take weeks to ascertain how dangerous, or not, Omicron is, but early partial evidence suggests that: (1) it may not lead to more severe illness, (2) it is more infectious than the Delta variant with a higher reinfection risk, (3) current vaccines and treatments may be less effective against it. Where do we stand? (1) In Europe, the epicentre of the pandemic where Omicron has already been around for a few weeks, cases are at an all-time high, but hospitalisations and fatalities stand at a third of the previous peak. (2) Countries tend to respond by assuming the worst and buying time by closing their borders – overreacting and political signaling are common. (3) We don’t yet know what the economic effect of the new variant will be, but the trajectory of the global economy still heavily depends on the path of the pandemic. No lasting economic recovery will ever take place before Covid-19 is over (or becomes endemic).
  • Another factor is at play behind the fifth wave and what’s coming next: vaccine resistance. It’s being fuelled by (1) mistrust in authority and governments (often among minority groups); (2) libertarian aspirations and anti-establishment attitudes, (3) conspiracies fomented by nationalist and populist movements. In the US and Europe, being vaccinated or not has become a political identifier which exacerbates polarization and political discontent.
  • The outcome of COP26 that ended on 12 November in Glasgow was mixed – at best. Some positive steps were taken, most notably pledges to reduce methane emissions and deforestation, but overall, they fall short of what is required to address in earnest our climate emergency. The promises made are neither binding nor yet accompanied by any concrete action plan. In short: the intention-action gap has widenedand the risk that the climate crisis becomes unmanageable has risen. On the positive side, the zeitgeist has irrevocably changed. Most countries and industries now recognize the need to take decisive action. Talk and promises are easy, but now, the weather eye of activists, public opinion, and increasingly regulators, will make sure they are kept. Net 0 laggards will become increasingly targeted by emboldened activists. Like for coal, everything ‘brown’ (e.g., SUVs, fast fashion, or private jets) will be subject to greater scrutiny and social opprobrium.
  • A notable achievement of COP26 is the massive implication of the private sector in pursuit of net zero objectives by 2050 at the latest. The Glasgow Financial Alliance for Net Zero (GFANZ – a global coalition of leading financial institutions) has committed USD130tn from 5tr back in April – a testimony to the velocity of change. This said, GFANZ can only operate at scale with (1) international carbon pricing, (2) the elimination of fossil fuel subsidies and (3) mandatory climate-related financial disclosure, none of which look likely to happen immediately. But reputational issues will force the financial industry to move faster than we think on the climate front – no major bank or fund will want to be called-out as a laggard, a liar, or a green washer.
  • Belarus’ recent ‘weaponization’ of migrants’ despair on its border with Poland and the EU is yet another example of hybrid warfare. In the coming years, expect more such migration crises as a toxic combination of climate emergency and geopolitical turmoil pushes ever higher numbers of people in a desperate flight for refuge. As just happened in Poland, these will fuel political tensions and fan far-right bellicose discourse.
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