“Omicron” will delay the economic recovery in Europe

18th January 2022
-IAM, News

Hugues Chevalier, Economist

According to the European Central Bank (ECB), the risks of a delayed economic recovery in Europe are increasing with the spread of the “Omicron” variant. Indeed, in the short term, the exponential increase in new contaminations due to this new variant should disrupt (again) the activity. So far, there are few closures or other coercive measures. Only some sectors have been affected, such as tourism and catering. In addition, a few countries, such as Austria, have imposed a lockdown of a few weeks, however without having the magnitude of previous measures. In contrast, the sick leave of millions of people on sick leave is currently disrupting business. In some sectors and regions, activity is running with 10% fewer people, slowing production and delaying further economic recovery. This slowdown in activity may be good news on the inflation front. Indeed, demand, which has been very strong in recent months, should be less dynamic and could allow bottlenecks to be absorbed more quickly and thus generate less pressure on prices. In addition, inflation seemed to have already peaked in mainland Europe before the “Omicron” slowdown. Uncertainties over the development of activity during the first half of the year and the easing of inflationary pressures have convinced the ECB not to tighten its monetary policy any faster. Although the ECB has announced the gradual halt of its asset buybacks over the coming months, its monetary policy should remain very accommodative and monetary tightening will only be carried out in stages to avoid harming the ongoing recovery with a too abrupt adjustment of financing conditions.