This one is really tough on morale. We knew that the pandemic was not over, but no one expected that, again this year, many parties of the holiday season. Phew …
Once the shock has passed, one has to wonder how the Omicron variant will affect the economy, interest rates, inflation. The questions are many, but the answers of economists are as muddled as their crystal ball.
“I remain confident about our economic forecasts, but the uncertainty has just risen a notch,” recognizes Matthieu Arseneau, deputy chief economist at the National Bank.
“It poses a fairly large risk, but it is difficult to see which edge it will go for now,” said Robert Hogue, economist at the Royal Bank.
In fact, it all depends on how severe the restrictions are and how long they last. If the measures announced Thursday by the Legault government were to gain momentum, the economy would end up suffering. And even more, of course, if other provinces or countries followed suit, such as Ontario. A series of global restrictions could slow the reestablishment of supply chains, which has an impact on the price level.
Some clarifications from South Africa
At the moment, little is known about this Omicron variant. However, a report from South African authorities on Friday provided some clarification.
According to the Minister of Health, Joe Phaahla, 1.7% of cases declared positive were admitted to the hospital during the 2e week of this 4e vague, where the Omicron variant dominates (78% of cases in South Africa).
In comparison, this proportion was 19% during the same week of the 3e wave, driven by the Delta variant. At first glance, therefore, the Omicron variant is less aggressive, since the rate of admission of patients to the hospital is 11 times lower.
Information is very important since health restrictions in Quebec as elsewhere are mainly explained by the authorities’ desire to protect hospitals from overcrowding. If the Omicron variant is less severe for people who get it, the impact on the economy will be less.
But there is a catch. The Omicron variant appears to be much more contagious than the Delta. In South Africa, there were over 20,000 cases during the 2e week of this 4e wave, i.e. 5 times more than the 4,400 cases in the same week of the 3e wave. In short, at the end of the day, hospitalizations were 2 times less, and not 11 times, as indicated by the hospitalization rates.
And again, the data should be interpreted with caution, since we do not know the effect of vaccination on the lower hospitalization rate of the 4e vague (44% of South Africans are vaccinated today, especially the elderly).
Benoit Durocher, senior economist at Desjardins Group, believes that the Omicron variant will slow the recovery of the economy of Quebec and Canada.
It puts more sand in the gear. It will slow down, but how much? At the same time, it is a film that we have already seen. There will be an increase in cases, then a decrease in the spring.
Benoit Durocher, Senior Economist at Desjardins Group
Another aspect to consider: the sectors that will suffer, such as restaurants and the arts and entertainment, will have the financial support of the governments of Quebec and Canada. In addition, consumers will spend the money they set aside for these sectors elsewhere, partially offsetting the negative economic effect of the restrictions. Remember the renovation boom in 2021.
Desjardins therefore maintains, for now, its forecast for real GDP growth of 2.8% in Quebec in 2022 and 3.9% in Canada. The institution’s economic service estimates that interest rates will rise twice in 2022, in April and July, each time by 0.25 percentage point. Another hike would take place in January 2023, taking the key rate from 0.25% today to 1% at the start of 2023.
National Bank is a little more optimistic. According to her, GDP will grow in 2022 by 3.3% in Quebec and 4.1% in Canada (after subtracting inflation). This increase would be less than in 2021 (6.2% in Quebec and 4.6% in Canada), which was recovering from a more difficult 2020.
The Bank’s economic service plans 5 hikes in the key rate in 2022, which would drop it from 0.25% today to 1.5% at the end of 2022, at the same level as before the pandemic.
The Omicron variant could therefore give the Bank of Canada a hard time. Most economists expect the Bank to have no choice but to raise rates, given the strength of the economy – exemplified by falling unemployment rates – and rising inflation .
In fact, other central banks have started to raise their interest rates, like the Bank of England, or announced hikes for 2022, like the US Federal Reserve.
But what will happen if the recovery of the economy is hampered by the consequences of the Omicron variant? What will the Bank of Canada do if unemployment rises, but inflation remains high?
To be followed carefully.