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OECD warns Omicron may intensify supply shortages and inflation

The Omicron coronavirus variant threatens to intensify imbalances that are slowing growth and boosting inflation, and to delay the world economy’s return to normality, the OECD said on Wednesday as it published its latest forecasts.

The Paris-based international organisation of largely rich country members warned that monetary policymakers should be “cautious” given the new strain of the virus and that the most urgent need is to accelerate deployment of Covid vaccines.

The recommendations came alongside its twice yearly economic outlook, which left global growth forecasts similar to those three months ago but significantly raised expected inflation.

Laurence Boone, chief economist of the OECD, told the FT that the Omicron variant is “adding to the already high level of uncertainty and that could be a threat to the recovery, delaying a return to normality or something even worse”. 

She did not contradict the hawkish stance voiced on Tuesday by Jay Powell, the chair of the US Federal Reserve, or recent comments by the Bank of England, commenting that these central banks had already been cautious and more persistent inflationary pressures in the US and the UK required a slightly tighter monetary stance.

Bar chart of 2022 Economic growth (%) showing OECD 2022  growth forecasts are little changed since September despite new Omicron variant risks

“There is no one-size-fits-all [monetary] policy because you have a very different situation in some emerging market economies with high inflation rates. The US is also different from Europe and also different from Asia where there’s much less inflation issue,” Boone said.

She stressed the need for policymakers to communicate clearly that they would not raise interest rates as a result of supply shortages, but would be ready to act if price pressures broadened and become self-reinforcing.

The OECD noted that the global recovery has been much stronger than it initially expected in 2021, but said this had now created a series of damaging imbalances that could persist longer than expected. “Supply shortages risk slowing growth and prolonging elevated inflation,” Boone said.

In the automotive sector alone, the OECD calculated that supply disruptions knocked more than 1.5 per cent off the size of the German economy this year and over 0.5 per cent also in Mexico, the Czech Republic and Japan.

Alongside such mismatches between supply and demand, the OECD’s main message was that there are many other large imbalances emerging in the global economy.

These range from the supply of vaccines — which is far greater in rich countries; a growing gap in economic performance between advanced economies and emerging markets; and a divide between the labour market performance of European countries and the US.

In Europe, employment is better protected and now higher than pre-pandemic levels, but economic output had not fully recovered lost ground. In the US, the reverse is true.

Boone said the European protection of jobs had been beneficial to people “but some of the necessary reallocation of jobs may not have taken place”. She also said that part of this important trend was likely to be because the initial coronavirus hit was harder in Europe than in the US.

Bar chart of 2022 inflation forecast (%) showing OECD 2022 inflation forecasts for advanced economies have been revised sharply higher

In the OECD’s economic forecasts, it projected world economic growth slowing from 5.5 per cent this year to 4.5 per cent in 2022, followed by a 3.2 per cent expansion in 2023.

Inflation in G20 countries was likely to rise from 3.8 per cent in 2021 to 4.4 per cent next year, before reducing to 3.8 per cent in 2023. However, the OECD forecast that inflation would be below 2 per cent in the eurozone that year, versus 2.4 per cent in the UK and 2.5 per cent in the US.

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