Part 1 : easing concerns about the Omicron variant
The extremely contagious nature of the Omicron variant and its greater resistance to vaccines have led to an unprecedented increase in infections in major western countries. However, the epidemic seems to have peaked in the UK and the US (Chart 1).
The experience of countries that appear to be out of the woods bodes well for the rest of the world. The pattern observed is that of a sharp rise in infection for 4 to 6 weeks, with a moderate strain on intensive care units and a relatively limited rise in deaths. This is in line with the results of studies indicating that the Omicron variant is less dangerous than the Delta variant and that vaccine-induced immunity and infection are effective against serious forms.
If this pattern is repeated in most countries around the world, we could see the global pandemic situation stabilise in the second quarter of 2022. Public health restrictions are measured (Chart 2) and even if they are strengthened, experience has shown that a drop in activity is quickly recovered.
The public health situation is unlikely to interrupt the economic recovery, and will at most slow it down.
Part 2 : activity well set
Globally, the Omicron wave does not seem to be having such a strong impact on activity as previous variants. Confidence surveys remained strong, and household consumption remains on a much higher trend than that prevailing before the crisis (Chart 3).
Supply problems have created latent demand, and the rebound in auto production in several countries suggests that these may be fading away. This could lead to a further upturn in industrial activity in the coming quarters. This issue should continue to be monitored.
On the fiscal front, the expected tightening for 2022 is unlikely to weigh heavily on growth. It is of the same magnitude as last year and concentrated in the US, where normalisation has already taken place (Chart 4). In Europe, the clause suspending Stability and Growth Pact rules will still apply in 2022. The pact is expected to be restored in 2023, but a revision process is being considered to ensure fiscal tightening is not excessively brutal.
The presidential elections in Italy and France should be monitored.
In the US, companies’ investment intentions remain very strong and households have not begun to tap into the stock of additional savings built up during the crisis, which constitutes a consumption reserve (Chart 5). Given the historically low debt burden, the private sector should be able to absorb rate hikes.
In China, stability is the watchword for this year of the 20th Communist Party Congress, which should reappoint Xi Jinping as head of the country. Economic policy will be more favorable to growth and the slowdown in the housing sector will undoubtedly be supported by the authorities. The continuation of the “zero-Covid” policy, however, could slow the recovery in consumption.
Energy prices (Chart 6) remain a variable to be monitored for activity in the short term. In China, rising coal costs led to power shortages and plant closures in the third quarter, but the situation appears to have returned to normal. In Europe, the thaw and LNG deliveries have eased the pressure, but a cold snap could trigger new record prices. As well as its effect on household purchasing power, rising energy prices could have a direct impact on activity in certain sectors.
Part 3 : focus on inflationary pressures
Price rises are reaching levels not seen in several decades in the US and the eurozone (Charts 7 and 8). US inflation measured year-on-year could slow in the coming months, with the spring 2021 comparison base being very high, but this does not mean tensions have been resolved.
The increase in the cost of housing will continue to spread in official statistics and the upturn in wage costs will impact the price of labor-intensive services such as health.
The breakdown of producer prices in the US, which measures the prices charged by producers, shows that this is not simply a problem linked to a significant portion of goods consumption being postponed as a result of the pandemic. We are also seeing a sharp increase in prices in services and construction.
Higher transport costs are also likely to push prices higher. China’s zero-Covid strategy has contributed to a sharp rise in freight costs, and the authorities appear to be continuing along this path to curb the spread of the Omicron variant. This could continue to disrupt production chains and thus delay the resolution of supply problems.
For the moment, household inflation expectations have risen for the short term but remain moderate for the medium term. Conversely, companies’ long-term cost expectations are picking up more markedly.
Part 4: lasting tensions on the labor market
Unlike previous recessions, unemployment fell very quickly in the major western economies (Chart 9). In the US, excluding data for 2020, we must go back to 1950 to see such a rapid drop in unemployment over six months.
Business demand for labour is strong, but labour supply is lower than before the crisis and the potential for a rebound seems limited by demographic trends. This imbalance between supply and demand is reflected in an exceptional increase in the number of job offers in the US and Europe (Charts 10 and 11). At the same time, there has been a sharp increase in resignations, as employees are more confident in their ability to find another job.
In order to attract and retain staff, US companies have significantly increased their salaries. Salary intention surveys are at all-time highs (Chart 12), suggesting that this trend is likely to continue. In the eurozone, labor shortages are also a major issue for companies, which report that this factor is limiting their production. However, this is not yet reflected in wages.
A sharp slowdown in growth from current levels is needed to deflate labor markets. Historically, growth needs to fall below 0.9% in the eurozone and below 1.6% in the US. Given the current extremely accommodative nature of monetary policy, the road ahead for central banks is potentially very long.
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The opinion expressed above is dated January 2022 and is liable to change. Latest available data as of publication date.
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