Omicron variant could slow global growth, says IMF chief Georgieva

The new Omicron variant of COVID-19 could slow the global economic recovery, just as the Delta strain did, IMF chief Kristalina Georgieva said on Friday.

“A new variant that may spread very rapidly can dent confidence and in that sense, we are likely to see some downgrades of our October projections for global growth,” she said at a Reuters event.

In its most recent World Economic Outlook, the fund projected global growth of 5.9 percent this year and 4.9 percent in 2022, but the United States and other major economies suffered sharp downward revisions after the spread of the Delta variant “caused some friction,” Georgieva said.

“Even before the arrival of this new variant, we were concerned that the recovery, while it continues, is losing somewhat momentum,” the IMF chief said, noting that policymakers are now dealing with new issues like inflation.

The IMF’s most-recent forecasts raised concerns that global supply chain issues and uneven distribution of vaccines were slowing the rebound, and causing some countries to be left behind.

A surge in demand in many advanced economies coupled with shortages of key components like semiconductors has fueled a wave of prices increases.

Less than two months ago, Georgieva expressed confidence that inflation would not become a “runaway train” but on Friday she said the US Federal Reserve will have to increase interest rates in 2022, rather than in 2023, as the IMF previously predicted.

The Fed, which cut the benchmark lending rate to zero in the early days of the pandemic, already has started to pull back on its stimulus measures and has signaled it will speed up that process, which would put it in position to lift rates off zero by mid-year.

“We do believe that the path to policy rate increases may be walked faster,” Georgieva said.

Georgieva said high inflation in the United States should be addressed by policymakers but that such hefty price pressures are not being observed equally around the world, allowing other economies to change policy at their own pace.

The IMF’s head added that the strength of the US economy has a positive spillover effect around the world even if it means the US Federal Reserve will wind down its accommodative policy stance in the months ahead, as most economists now expect.

Georgieva said tariff reductions are a “useful tool” to help control inflation and that she was encouraged by US Trade Representative Katherine Tai’s work on tariff reductions through an exclusion process.

“It is not a silver bullet. There has to be action on all these fronts, so we can see the issue of inflation being contained.”

Georgieva called for more aggressive debt restructuring for the current debt burden in developing countries not to become a long-term headwind.

“The reality is that 2022 is going to be a very pressing year in terms of dealing with debt,” she said, adding that sovereign debt has risen 18 percent during the COVID pandemic and it will take decades to go to pre-pandemic levels unless there is a “much more thoughtful and aggressive” policy.

“So far, interest rates are relatively low, this is not so dramatic. Going forward … that may not be the case.”