By Howard Schneider

WASHINGTON (Reuters) – The rise of a brand new coronavirus variant has raised fears of a double-barreled hit to the U.S. financial system of slowing development and still-high inflation as provide chains stutter, native governments take into account new restrictions and shoppers assess the well being dangers of every part from eating out and touring to returning to work.

However economists to this point see the danger of “stagflation” – that poisonous mix of weak development and robust inflation so feared by policymakers – as solely half-baked.

Costs are rising, in the US extra notably than elsewhere, and the tempo has proved extra persistent than policymakers anticipated. Development, although, is much from stagnating, and appears on observe to proceed subsequent yr at an above-average tempo that might push the US to full employment in a matter of months.

Some forecasters have tempered their predictions for development in U.S. gross home product due to the brand new variant. However these revisions have been modest, and high-frequency information on U.S. airline journey and metrics like restaurant visits and bank card spending to this point present no apparent change in current weeks as case counts rose and, extra lately, the Omicron variant was recognized.

“We’re not going to see stagflation. We’re going to see an inflationary growth,” with robust development persevering with and the tempo of value will increase already prompting the Fed to reorient coverage in the direction of containing inflation, stated Glenn Hubbard, chair of the Council of Financial Advisers beneath former President George Bush and now a Columbia College economics professor.

A Reuters ballot of economists confirmed a median forecast of three.9% development for the US in 2022, unchanged from November and about double the speed of underlying development development estimated by the Federal Reserve and plenty of non-public forecasters.

Federal Reserve policymakers will subject their very own new forecasts subsequent week in a gathering anticipated to start extra pressing preparation to guarantee inflation stays beneath management. These forecasts will possible describe an financial system nearing full employment subsequent yr and persevering with to develop quicker than was the norm earlier than the pandemic.

The November unemployment fee of 4.2% is already effectively under the 4.8% degree projected by Fed officers in September, and close to the 4% fee thought of sustainable over the long term.

‘BOOMING’ ECONOMY

Policymakers may also account for stronger-than-expected inflation by possible flagging quicker fee will increase and approving plans to finish their ongoing bond purchases in March as a substitute of June.

It’s nonetheless early within the effort to know how the Omicron variant will behave, and the way folks will behave as they work together with it.

If it proves quicker spreading, extra evasive of vaccines, and as lethal as Delta, it might set off one other wave of restrictions in some nations, and manufacturing facility or journey shutdowns in others – with probably detrimental outcomes for international development and jobs.

“It is simply not attainable for nations to redo the form of large financial coverage push, large fiscal coverage push, that they had been capable of do these previous two years. It can’t be repeated once more,” Worldwide Financial Fund Chief Economist Gita Gopinath stated Thursday at an occasion in Geneva.

If the Omicron variant causes a brand new and critical financial shock, “we’ve got the actual threat of one thing we’ve got averted to this point, which is stagflationary considerations.”

However to this point markets, analysts and financial information are usually not reflecting that kind of worst-case consequence.

The newest variant was first recognized in early November. Since then the weekly numbers of vacationers cleared onto U.S. flights by the Transportation Safety Administration has remained about the identical or barely larger as compared with 2019, because it was earlier within the fall. In-person bookings at eating places have additionally held regular, in accordance with information from reservation web site OpenTable.

A current research by San Francisco Fed researchers https://www.frbsf.org/economic-research/publications/economic-letter/2021/november/how-strongly-are-local-economies-tied-to-covid-19 famous what has turn out to be a staple hope amongst policymakers: that U.S. companies and shoppers will, between the safety provided by vaccines and modifications in conduct, proceed to work across the virus.

“Native financial exercise…was intently associated to native COVID-19 situations final yr however steadily turned decoupled because the pandemic wore on,” the researchers wrote, with the current Delta wave inflicting solely a modest dip in financial exercise in comparison with the primary months of the well being disaster.

“It could not really feel prefer it given the elevated inflation atmosphere, renewed COVID considerations and heightened market volatility, however the financial system is booming,” Oxford Economics Chief U.S. Economist Gregory Daco wrote this week.

Oxford’s restoration tracker, an index of mixed well being, financial and monetary information, tumbled on the finish of November, however the fall was most pronounced amongst monetary indicators after markets took a short hit after Thanksgiving on information of the Omicron pressure. Indicators of demand and employment remained robust, and Daco has to this point responded to the Omicron information with a minimal downgrade to his GDP development outlook for 2022 – to 4.4% from 4.5%.

Goldman Sachs (NYSE:) economists, laying out Omicron eventualities that ranged from a worst-case revival of the pandemic to a extra benign consequence the place the variant causes much less critical sickness, stated they anticipated the final word hit to GDP to be modest, and lowered their 2022 forecast to three.8% from 4.2%.

“Authorities coverage within the U.S. has turn out to be a lot much less delicate to virus unfold since vaccination charges elevated this spring,” Goldman economists wrote, noting that their in-house index of presidency coronavirus restrictions barely budged through the Delta wave of infections over the summer time. As well as, “shopper spending and job development have turn out to be a lot much less delicate to native virus unfold…possible as a result of decrease COVID threat aversion within the U.S.”

That may depart the Fed centered on inflation even because it watches the course of the virus, and on that entrance the brand new variant could if something agency up the central financial institution’s plans, Goldman’s staff wrote.

“We see medium and longer-term dangers as principally inflationary as a result of potential delays in provide chain normalization and easing of employee shortages,” Goldman wrote, with a fee improve possible by mid yr.