Goldman On Omicron: ‘The Range Of Outcomes Remains Unusually Wide’

It’ll likely be weeks before the scientific community is prepared to make definitive statements about the Omicron variant, but traders aren’t a patient bunch.

Market participants want answers now, which means it’s time for scenario analyses.

In a note dated late Sunday, Goldman presented four possibilities, while conceding, up front, that “the transmissibility, degree of protection from vaccines and prior infections, and disease severity of Omicron… remain uncertain.”

The bank’s “downside” case assumes Omicron is more transmissible than Delta and also proves more capable of evading immunity both conferred by the vaccines and prior infections. “In this scenario, Omicron eventually outcompetes Delta globally,” the bank’s Daan Struyven wrote, adding that Goldman’s downside scenario assumes Omicron evades immunity against hospitalizations “only slightly more than Delta, and causes similarly severe disease.”

In that downside case, Goldman would expect a “large” infection wave during the first quarter of 2022, and a “significant tightening” in the bank’s lockdown index. The attendant hit to GDP in Q1 would be “sizable,” the bank said, but noted that it would likely abate “gradually” in the spring “as antivirals and redesigned vaccines are distributed.”

Such a development would probably mean inflation is lower than forecasts due to the demand hit for services and energy, but assumed upward pressure on prices for goods (given ongoing supply constraints) means the net impact on overall inflation would be “ambiguous,” as the bank put it.

Specifically, Goldman’s downside scenario suggests global growth could slow to a 2% QoQ annual rate, far below the bank’s existing base case (figure below).

Growth would pick back up in the summer. For the year (i.e., for 2022) growth would be 4.2%, just 0.4% below the  bank’s current forecast.

The bank presented a trio of additional scenarios, one of which is a “false alarm” outcome (no significant impact on growth or inflation) and another is an “upside” conjuncture in which “Omicron is slightly more transmissible but causes much less severe disease.”

Out of respect for the inherently uncertain nature of the situation, Goldman also posited a “severe downside” scenario in which the variant causes more severe disease and immunity against hospitalizations and death proves to be “substantially worse than for Delta.” Of the fallout from such an outcome, Struyven said only that the hit to growth would be “significantly” worse than the bank’s other downside scenario.

Ultimately, Goldman is just like everyone else — watching and waiting. The bank isn’t making any “Omicron-related” changes to its baseline macro or monetary policy forecasts until it’s possible to assign something like subjective odds to its four scenarios. “The range of medical and therefore economic outcomes remains unusually wide,” Struyven remarked.