Economists Assess Omicron Risk For Investors: 'A Global Issue In The Coming Weeks'

The SPDR S&P 500 ETF Trust SPY lost ground once again Tuesday as investors try to get a clear picture of just how much of a negative economic impact the omicron variant of COVID-19 will have on the global economy.

Near-Term Weakness: Omicron was a major topic at the BNP Paribas 2022 Global Outlook virtual press event on Tuesday. BNP Chief Global Economist Luigi Speranza said Tuesday that the emergence of a new COVID variant does not significantly change the firm’s bullish medium-term outlook for the global economy.

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“Our bias overall is to think recent developments are a net negative for growth but more ambiguous for inflation,” Speranza said.

“The extent of the impact will depend on the transmissibility, virulence and — crucially — the ability of the omicron variant to evade vaccines, which will not be known for at least a couple of weeks.”

As a result, Speranza said it will likely be unlikely investors will see a return to recent highs for risk assets in the near-term, and a worst-case scenario of a major global health emergency would obviously be a disaster for investors.

The good news in the near-term is that Speranza believes the recent omicron sell-off in some global markets is likely pricing in too large of a probability of a worst-case scenario and may be creating buying opportunities for selective investors.

The Numbers: Finally, Speranza said past outbreaks suggest it’s unlikely the world will be able to prevent circulation of the new variant at this point. Case numbers typically represent a rear-view mirror of the outbreak, and Speranza said even a prompt and aggressive response will likely not keep omicron in check.

“We therefore assume that the new variant is likely already sufficiently widespread to represent a global issue in the coming weeks,” he said.

Despite omicron concerns in the near-term, BNP remains bullish on the 2022 global economic outlook. The firm is projecting 4.8% global GDP growth in 2022 and 3.8% growth in 2023. However, BNP’s bullishness does not extend to China, which Speranza said may struggle to hit BNP’s 5.3% 2022 GDP growth target.

Brusuelas’ Take: BNP isn’t the only firm weighing the potential impact of omicron. Joseph Brusuelas, chief economist for RSM US LLP, said this week that he is still projecting at least 4% U.S. GDP growth in 2022 and an unemployment rate of just 3.5%.

“All of this will happen as inflation slowly recedes from what we think will be a peak near 7% in 2021 to roughly 3% at the end of 2022, setting the stage for tighter monetary policy and a path back toward 2.5% growth in 2023,” Brusuelas wrote.

“While there is likely a wide range of possible outcomes linked to the omicron variant, we do not see a need to alter our growth forecast of 7.2% in the fourth quarter nor the rate for 2022.”

In fact, Brusuelas predicts economic growth and inflation will remain elevated enough that the Federal Reserve will increase the pace of its tapering from $15 billion per month to $30 billion per month at its December meeting.

Benzinga’s Take: Investors have seen this movie before. As long as omicron isn’t significantly more deadly than previous variants and/or extremely resistant to the existing vaccines, the negative market and economic impacts will likely be temporary.