As much as we’d like to look ahead to next year, COVID-19 developments are forcing us to focus on the near term. A number of countries have reported cases of a new \u201cvariant of concern,” Omicron, and travel restrictions are mounting. Oil prices fell by about US$10\/bbl on demand concerns, while reduced risk appetite saw bonds rally and equities fall. This all comes as a number of European countries were already experiencing a fresh wave of infections\u2014for countries like Germany, the worst so far in terms of case growth\u2014and re-introducing some containment measures. Despite early concerns about greater transmissibility and reduced vaccine efficacy, too little is known about Omicron at this stage to say how it will affect the ongoing global economic recovery. Lower oil prices and reduced tourism activity look likely in the near-term, but the broader impact on infection rates, hospitalizations and government-imposed restrictions is hard to say. Our base case continues to be that a higher rate of immunization in many advanced economies will weaken the link between case growth and severe illness\/hospitalization. Another wave of infections that slows the recovery has long been a downside risk to our forecast, and the probability of such an outcome has increased.<\/p>\n
Assuming Omicron risks are contained, we think growth prospects in 2022 will depend less on government restrictions and more on economies’ true productive capacity. And for a number of those we track, spare capacity is running out. Easing supply chain bottlenecks and rising business investment should provide a bit more running room, but tight labour market conditions are likely here to stay. That’s expected to keep a floor under inflation even as unexpectedly strong headline rates peak in the coming months. With the building blocks of a consumer-led recovery remaining in place, we think central banks will be easing off the accelerator next year. For the BoE, BoC and Fed that means raising interest rates, while for the ECB and RBA we expect QE will be slowed or phased out in 2022. Omicron threatens to delay some of those moves but market pricing is still generally ahead of our expectations for tightening next year.<\/p>\n