4 Scenarios for Omicron’s Economic Impact – Goldman Sachs

With the Omicron variant creating a ton of uncertainty in the markets, although it probably shouldn’t, considering new variants seem to come out every other week, investors are scrambling to figure out what to do. Last week finished in a blood bath due to the news, but markets seem to be recovering nicely today. 

Goldman Sachs spent the weekend laying out four possible scenarios that could play out in the coming months as we look to figure out what Omicron actually means. The firm noted, The transmissibility, degree of protection from vaccines and prior infections, and disease severity of Omicron will shape its potential economic impact…

Scenario #1 – Worse Case Scenario 

It’s always important to have a worst-case scenario plan in place. If it doesn’t happen, great! If it does happen, not great, but at least you’re prepared! Goldman notes this is the least likely scenario to happen, but if Omicron is substantially worse than Delta, the economic impact would obviously be worse, while “the net overall inflation impact is again ambiguous although the moves in energy and services inflation(down) and in goods inflation (up) are larger.” The economic impact would be far worse than a 2% global growth slowdown with impacts that would affect the labor workforce, inflation, supply chains, and just about every other aspect of life, including sanity. 

Scenario #2 – The Not so Great Scenario 

Omicron supposedly transmits quicker than the Delta variant and evades immunity from vaccines and prior infections better. If this is true, Omicron overtakes Delta as the dominant strain and “evades immunity against hospitalizations only slightly more than Delta, and causes similarly severe disease.” Q1 would see a large spike in infections and impact economies around the world, resulting in a global growth slowdown of 2% quarter over quarter, which is 2.5% below Goldman’s current forecast. 

Scenario #3 – False Alarm 

The scenario I’m sure we are all hoping for, unless you have a large cash reserve and wanted a large dip, is a false alarm. In this scenario, Omicron is a ‘nothingburger’ and similar to Delta. It has little to no significant impact on global growth and inflation. 

Scenario #4 – Best Case Scenario

In this scenario, Omicron is more transmissible than Delta but has less severe effects. This would result in a net reduction of disease burden and increase growth from Goldman’s baseline economic forecast. If this happens, inflation is likely to decrease quicker than currently expected due to a rebalancing of demand for certain goods and services. Labor shortages would be fixed faster and supply chains restored. 

Now Goldman Sachs certainly isn’t a biotech firm, but they probably have close ties to many. Money also speaks a lot louder than words, something of which they have a lot of. The firm notes that Omicron could still have sizeable effects on growth, but with medical and economic opinions so wide, it’s hard to know exactly how this will be handled. Because of this, Goldman stated, “we are not making Omicron-related changes to our growth, inflation, and monetary policy forecasts until the likelihood of these scenarios has become somewhat clearer.

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