In the days following the first Omicron headlines and associated post-holiday market tumult in the US, Wall Street was somewhat reluctant to alter their macro forecasts.
Uncertainty was high, liquidity was low. It would’ve been rash to cut growth outlooks based solely on media speculation about transmissibility and the prospect of the new variant evading vaccines.
Fast forward a week and health officials are still largely flying blind, to say nothing of economists. Extreme ambiguity notwithstanding, Goldman is playing it safe. After initially declining to make changes to their baseline macro or monetary policy forecasts based on the new variant, the bank cut its GDP forecast for the US.
“The emergence of the Omicron variant increases the risks and uncertainty around the US economic outlook,” the bank’s Joseph Briggs wrote, in a note published just after midnight on Saturday. “While many questions remain unanswered, we now think a moderate downside scenario where the virus spreads more quickly but immunity against severe disease is only slightly weakened is most likely,” he added.
In their initial attempt to quantify the prospective impact of the variant, Goldman posited four scenarios. Briggs, citing colleagues, said the bank’s “false alarm” scenario is now less likely to pan out. “Omicron is spreading rapidly in South Africa,” he remarked, before noting that even so, “early data and expert opinion do not point to sharp deterioration in vaccine efficacy against hospitalizations and disease severity.” That, in turn, means that although the most benign scenario now seems too optimistic, a “severe” outcome isn’t likely to play out either.
In short, Goldman is inclined to view their “downside” scenario (a middle-ground between an extremely adverse situation and a pair of more optimistic hypotheticals) as “the most likely Omicron outcome.” The bank now assumes the virus will spread more rapidly, but immunity against hospitalizations will decline “only slightly more.”
Goldman reviewed a variety of channels through which Omicron could impact the US economy.
The bank thinks the risk to the services sector is mitigated by reduced sensitivity to the spread of COVID on the part of government, employers and consumers. COVID “risk aversion” is simply lower now in the US than it was, Briggs said. Using data from the Delta wave, Goldman noted that “although spending growth slowed down somewhat, it remained positive for most service categories,” while real PCE services spending growth wouldn’t have been appreciably higher in August and September in the absence of the Delta variant.
As for supply chains, Briggs reiterated previous research showing the Delta wave exacerbated shortages mainly due to spillovers from Southeast Asia. “The good news is that vaccination rates [there] have increased dramatically since mid-March,” he said, suggesting there’s now “less scope for severe supply chain disruptions,” even as goods supply could see a “moderate” hit.
“Hiring slowed significantly — particularly for leisure and hospitality jobs — during the Alpha and Delta waves, despite labor demand remaining quite firm,” Briggs said. “This pattern suggests that labor supply is the main driver of hiring slowdowns during COVID waves.”
What does all of this mean for the US economy? Well, Goldman reckons growth will take a hit in Q1 and Q2. Specifically, the bank cut its Q1 forecast by 1.5pp and its Q2 outlook by 0.5pp “to incorporate Omicron-related drags on reopening and goods supply that we expect will weigh on consumption growth in these quarters.”
On the bright side, the bank also upped its outlook for Q4 2021 to account for a gradual easing of supply constraints.
Ultimately, Goldman now sees annual 2022 growth of 3.8% versus 4.2% previously, and Q4/Q4 growth of 2.9%, down from 3.3%.
As for inflation, the bank conceded the cross-currents make forecasting all but impossible. “Each of the three effects of Omicron poses a distinct risk to our inflation forecast that makes it difficult to determine the net impact,” Briggs wrote, calling the near-term effect of Omicron on inflation “ambiguous.”