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Omicron: the sequel may be more virulent than the infection

Omicron: the sequel may be more virulent than the infection

Global economic recovery after the Covid crisis threatened

By Anjan Roy

The waves of new variations of the old cursed pandemic are bad news for the health of the planet. Moreover, the economic disruption they have created is a double whammy. The only good thing is that people quickly learn to deal with new situations, no matter how difficult.

When a South African doctor conclusively proved infection with an even more infectious variant of the old covid-19 virus, it made your back shiver. All countries have recognized the possibilities of another round of mass disease, overcrowded hospitals, shortages of essential drugs and medical services, and then further closures.

Several countries have already imposed new travel restrictions. Japan, for its part, was overfed and reportedly halted all upcoming international flights. Some European countries are doing this, while rates of covid infection are already rising.

China, the country that unleashed this horrific situation in the world, continues its crude policy of zero tolerance for covid infection. Brazil was another weak point, with a high incidence of infection, omicron or not omicron.

Doctors are already saying that although the mutant virus is much more infectious than the previous Delta, it has so far proven to be less deadly. Symptoms of the omicron variety are much milder and do not require immediate hospitalization. However, it still required medical attention and treatment, especially to isolate and spot its spread.

And there is the cache. If controlling the spread of the omicron variety of covid requires even more vicious isolation and lockdown, it will surely affect the ongoing global economic recovery. The IMF had forecast a comfortable economic recovery before the omicron spread was announced. Now, after their emergence and rapid spread, they should be reviewed.

Already, global financial markets have reacted to the news of the new variant and its typical nature. The markets fell sharply and they are still awaiting further details. As more and more news emerges about the omicron variety, the financial markets would surely react. In itself, this will leave bumps on countries, depending on their other strengths or weaknesses.

It is not unknown. Immediately after the 2008 global financial crisis and the disruptions that followed, economies went into a spin. As the American economic authorities had reacted to the evolution of the scenario, they left additional collateral damage.

Recall what happened with the announcement of the reduction in bond purchases by the US Federal Reserve, which boosted sentiment in financial markets and kept interest rates low. News of the Fed’s reduction in bond purchases pushed up their yields and financial flows to emerging market economies collapsed. Most countries’ exchange rates plunged and they faced yet another crisis.

Based on the impact of the US tapering, the large emerging economies immediately transformed into a new category, the Frail Five, which experienced a sharp decline in their exchange rates, domestic financial uncertainties and a further downturn in the economic activity.

Some sort of instability in financial markets following a severe omicron spread and further lockdowns could again give rise to uncertainties. This would of course depend on their current economic strength. However, it is possible to anticipate that those who already face high inflation (and some are), with smaller foreign exchange reserves, exposure to short-term loans and dependence on exports towards China or the United States, will face possible inflection points.

Public health and hygiene risks aside, the risks of degradation now emerge from what two great economic powers would do. China and the United States are the engines of the global economy, and their national economic policies will influence what happens to others.

There are now two main threats. The first is that China is slowing down and a slower China poses a threat to a multitude of countries with many associated risks. The second is the US Federal Reserve’s monetary policy stance and the financial problems that are spreading around the world.

China first. In themselves, these Chinese economic trends pose a serious problem for the world economy. Real estate is estimated at nearly 30% of Chinese GDP according to very careful calculations by Chinese expert Kenneth Rogoff.

The problem of the real estate giant, Evergrande, which held more than $ 300 billion in loans to various banks and individuals who kept their money with the company, is having difficulty repaying. Some of the loans were in default and the company is struggling to meet its obligations. Any failure of Evergrande could spell disaster for Chinese banks as well as a large number of Chinese family investors.

Such a development could undermine the Chinese financial system, and the government has shown no signs of bailing out the company as part of its calibrated stance to correct the housing bubble. He seeks to give the impression that whoever is in trouble, the government is not going to bail out. It may be good in the long term, but in the short to medium term it could be extremely destabilizing.

In addition, the steps the Chinese government has taken to tame the country’s tech sector and its tech billionaires have also had a bewildering impact. Everything that is happening in China is on a gigantic scale. So the government trying to teach billionaires a lesson also has scale implications. A series of global financial operators have been affected by the Chinese government’s decision.

If all of this leaves the Chinese economy to slow or even stop, it could have a serious impact on many other countries. A drop in Chinese consumption of iron ore, steel, aluminum and many more, coupled with a feeling of weaker consumption in China would lead to a drop in its imports. This could affect countries exporting raw materials to finished products to China. On the other hand, a tightening of US monetary policy could also affect countries. To the extent that these would influence exchange rates and the flow of funds within a country, they would be vulnerable.

How does India find itself in this situation? Quite comfortably. With overflowing foreign exchange reserves and relative price stability, India is not exposed to risks from any of these potential sources of instability in the global economy. It turns out that if exports matter less, India should not be very exposed to declining global demand. (IPA Service)