By James Pethokoukis

As numerous media explainers about the Omicron variant make clear, there’s plenty we don’t know about this emerging coronavirus strain, from transmissibility to symptoms to vaccine effectiveness. So estimating the economic impact is an exercise in scenario planning. After all, Omicron could turn out to be a momentarily scary false alarm. Let’s hope.

But maybe the variant will have significant health effects, and thus a significant economic impact. Let’s say it’s a slightly worse version of the Delta variant: greater transmissibility, causes slightly more hospitalizations, but overall a similarly severe virus in terms of health effects. In that case, there may be increased government restrictions as well as changes in individual behavior — but also new vaccines and antivirals. Here’s the Goldman Sachs take on that scenario, as well as one even worse (bold by me):

Global growth in Q1 slows to a 2% quarter-on-quarter annual rate, 2½pp below our current forecast, and growth in 2022 as a whole is 4.2%, 0.4pp below our current forecast. In contrast, growth in 2023 is 3.8%, 0.3pp above our current forecast. Inflation in 2022 is probably below our current forecast in services and energy (because of weaker demand) but above our current forecast in goods (because of weaker supply), with an ambiguous net impact on overall CPI inflation. . . . In a second and less likely “severe downside” scenario, both disease severity and immunity against hospitalizations are substantially worse than for Delta. In this scenario, global growth is substantially lower than in the first downside scenario, while the inflation impact is again ambiguous.

Now, there’s an interesting potential twist here when it comes to the United States. Washington is currently focused on President Biden’s nearly $2 trillion “Build Back Better” social/climate spending bill. It passed the House just before the Thanksgiving congressional recess, and Democrats hope it can pass the Senate and get Biden’s signature by Christmas. Although the bill seems broadly popular, Republicans aren’t giving up, arguing the package will further fuel surging inflation by pumping more money into the economy. And it’s a message that’s had some resonance, polls also suggest. This from a Morning Consult/Politico poll out last week:

Roughly half of voters (49 percent) support the roughly $2 trillion climate and social spending package, while 38 percent oppose it. . . . A plurality of voters (43 percent) say they think the package will make inflation “worse,” compared with 26 percent who think it will make inflation better and 15 percent who say they think it will have no impact. . . . The bulk of independent voters (48 percent) and the majority of Republicans (74 percent) think the spending will make inflation worse, while 45 percent of Democrats think it will make it better versus only 14 percent who say worse.

But maybe, depending on the variant’s severity, Omicron variant will generate a second line of criticism about BBB — that it’s off-point right now, that it’s a bill for post-pandemic America, not an America still in the middle of a dangerous outbreak. This from Capital Economics (bold by me):

Democrats were about to use their one reconciliation for the current fiscal year to pass more of President Biden’s Build Back Better agenda in a $1.8trn bill. That would make passing additional near-term stimulus more difficult if, as we suspect, Republicans were reluctant to support it to ensure a filibuster-proof majority. If it became clear within the next week or two that Omicron really was a big threat to the economy, the Democrats might even come under pressure to scrap their current reconciliation bill with its focus on longer-term investments.

For what it’s worth, the PredictIt odds on the BBB reconciliation bill passing by Christmas is down 6 points this morning to 71 percent.

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