Impact of Omicron on emerging economies to depend on restrictions, policy support: Moody's

The economic impact of the Omicron variant of COVID-19 on emerging economies will depend on a mix of government restrictions, public comfort with social interactions, and capacity of governments and central banks to provide additional policy support to the private sector, Moody's Investors Service said on Wednesday.

The emergence of the new variant poses new risks to the global economic growth and inflation outlook, as concerns mount about the variant's health risks and several countries have imposed new travel restrictions in recent days.

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These restrictions will likely increase over the coming weeks until scientists learn more about the variant, it said.

Continued progress in global vaccination efforts and public compliance with the use of tools such as masks and social distancing will be important factors in determining the economic impact of the new variant.

"Countries with an assured supply of effective vaccines and delivery systems, and high levels of vaccine acceptance by the public, will remain better positioned," Moody's said.

The US-based agency said European countries including the UK, Germany, France, the Netherlands and Belgium have detected Omicron cases, prompting new travel curbs. Moreover, the restrictions imposed following a recent rise in Delta infections could now be further extended and expanded.

China's zero-tolerance COVID-19 policy will further delay relaxation of rules surrounding international travel in the face of the Omicron variant. If the variant is discovered in the country, authorities likely will increase the severity of restrictions, it said.

"The economic impact on other emerging market countries will differ, and will depend on a mix of government restrictions, public comfort with social interactions, and the capacity of governments and central banks to provide additional policy support to the private sector, if needed. Emerging market countries facing travel bans, including South Africa, as well as those dependent on tourism revenue face further downside risks," Moody's said in a report.

The new, and potentially more contagious variant Omicron, was first reported to the World Health Organization (WHO) from South Africa on November 24. It has since been identified in about 17 more countries including Botswana, Hong Kong, Israel, Canada, Spain, Portugal, Germany and Australia.

Moody's said the emergence of the new variant also comes during a period of fragile economic recovery, with stretched supply chains, elevated inflation and labor market shortages. Business disruption resulting from the spread of the new variant could prevent supply chain stresses from easing, dampening productive capacity and stoking further cost pressures in sectors with exposure to global supply chains.

On the demand side, fear of infection could prevent a large proportion of individuals from engaging in economic activity that requires close contact. Thus, demand could diminish for services ranging from hospitality to travel, at a time when holiday-related spending would usually ramp up.

"Business plans to gradually return to a post-pandemic new normal are now uncertain. Until there is more clarity on the overall pandemic situation, fear of contracting COVID-19, more prolonged uncertainty surrounding schools and child care, and renewed restrictions on international travel will continue to curtail labor supply," Moody's said.

As per data released on Tuesday, India's GDP growth in the July-September quarter of the current fiscal (2021-22) was 8.4 per cent, slower than the 20.1 per cent expansion in the April-June quarter.

Chief Economic Adviser (CEA) K V Subramanian has said that India is expected to log double-digit growth in the current financial year (April 2021 to March 2022).

The Indian economy had shrunk by 7.3 per cent in the 2020-21 fiscal (ended March 2021) as pandemic induced restrictions battered business activity.

Moody's has forecast a 9.3 per cent growth in current fiscal, followed by 7.9 per cent in the next financial year. Another rating agency Fitch has projected a GDP growth of 8.7 per cent in the current fiscal year ending March 2022 and 10 per cent in next fiscal.

S&P Global Ratings too forecasts a 9.5 per cent growth for current fiscal ending March 2022 and 7.8 per cent for the year ending March 2023.