Too soon to tell Omicron impact on economy

Omicron’s impact is expected to be acute but contained to the 1Q22, says the ICAEW


IT WILL be very difficult to forecast how the Omicron variant will impact the economy, experts said.

The economic performance is dependent on how the variant develops and the vaccine efficacy, as well as the governments’ reaction in containing it.

MIDF Research VP and head of research Imran Yassin Md Yusof said there are two possible scenarios — Omicron is similar or more deadly and infectious than the Delta variant or Omicron spreads less quickly than Delta and is isolated within a few regions.

“In the first scenario, the impact could be at least similar to the impact of Delta or possibly more severe, especially if it is found that vaccines are less effective against it.

“This may have a negative impact on sentiments (whether business, investment, financial markets), which may also be exacerbated by possible government reactions worldwide (such as lockdowns) should Omicron become a burden to their health system,” he told The Malaysian Reserve (TMR).

Imran said this will result in flights to safety in the financial markets, increasing their volatility.

“In the second scenario, the impact may be less than Delta’s impact and the global recovery should continue with some minor hiccups. In this scenario, financial markets will likely be more concerned about earnings growth potential and other factors such as valuation,” he added.

Global health authorities have expressed concerns over the Omicron variant with its high number of mutations, which may allow it to evade existing immunity to Covid-19.

Putrajaya has decided to delay the country’s transition into the endemic phase as there is too much uncertainty regarding the recent spread of the Covid-19 Omicron variant.

Omicron’s impact is expected to be acute but contained to the first quarter of 2022 (1Q22), according to the ICAEW.

“The Omicron variant poses a risk to the recovery and growth of South-East Asia economies, especially if it is able to circumvent the defences built up by the current vaccination progress,” Elaine Hong, ICAEW regional director for China and South-East Asia, said in a statement.

In the worst-case scenario where economies return to lockdowns, ICAEW projects global GDP growth to drop from the current forecast of 4.5% to 2.3%. This would have a ripple effect resulting in weaker export demand for South-East Asia, which is projected to reduce growth from 6.1% to 4.3% in this scenario.

JF Apex Securities Bhd head of research Lee Chung Cheng opined that the new variant might affect business sentiment as fear of another lockdown and movement restrictions could jeopardise the economy and business activities.

“We could see a slump in capital market and ringgit as a result of portfolio outflow, and mounting of public debt and budget deficit for a stimulus package to aid the slumbering economy,” he told TMR.

Meanwhile, Kenanga Investment Bank Bhd economic research head Wan Suhaimi Wan Mohd Saidie said it is still early to speculate, as the variant could be highly transmissible but not as virulent.

“If it is both then the worse case is another global lockdown, which could scuttle the growth recovery momentum. (A) negative for financial markets and currencies except for safe havens, ie government bonds and US dollar,” he told TMR.

Echoing the sentiment, Rakuten Trade Sdn Bhd head of research Kenny Yee said it is still too early to comment on Omicron, but global markets are already bracing for the worst.

“Since our market has been sold down post budget, the impact may not be too severe,” he told TMR.


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