Impact of Omicron variant on economic growth likely to be short lived

European Investment Manager12 Jan 2022

A flurry of central bank meetings in mid-December 2021, including those of the UK, the US and Europe, promised some clarity concerning the trajectory for interest rates and stimulus packages in the coming quarters and years. A hefty US inflation reading of over 6% for November helped focus attention on the tightening that loomed. The Bank of England unexpectedly increased rates while the ECB and the Federal Reserve spoke of a cautious and gradual approach. In summary, there was nothing to suggest in any of the commentaries that the on-going recovery would be put at risk by over-zealous policy moves.

The continued spread of the Omicron variant has presented a greater threat to economic growth globally, with daily reported cases reaching new highs in many countries. As ever, the threat for markets was the action governments were likely to take in order to combat this resurgence and the impact this in turn would have on the ability for companies to do business. While equity market volatility did increase, it became clear that the impact was likely to be short-term resulting in a healthy 3.94% increase for the MSCI Europe ex UK Index in December.

Germany heralded the end of an era as Chancellor Angela Merkel left office. Her 16 years in power have been characterized by stability and economic success despite some difficult events during her tenure, not least the financial crisis of 2008 and the threat this posed to the European Union. It is perhaps comforting then, that her successor Olaf Scholz, along with his traffic light coalition, are seen as a safe choice offering a degree of continuity from the Merkel reign.

2021 has been a good year for equity markets which offered one of the few alternatives to stubbornly low bond yields. It is fair to expect decent growth in 2022 as economies return to normal following the damage inflicted by the pandemic, resultant lockdowns and government restrictions. Perhaps the greatest threat to this scenario is inflation. Supply shortages, elevated energy costs and, to a certain extent, base effects from the pandemic can all be pointed to as temporary in nature but the duration of the pressure on corporate and personal finances can still prove more permanent as wage and price increases spiral. Central banks have the wherewithal to combat such a scenario but this may be at the cost of equity market performance so a note of caution should be sounded for the months ahead.

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