Omicron - one step forward, two steps back for economic recovery

Financial markets became volatile on Friday as news of the Covid-19 variant Omicron's emergence broke with shares, commodities and other assets falling sharply and investors flocking to the safety of government bonds.

Tuesday, November 30th 2021, 6:26AM

by Matthew Martin

Mark Lister.

But, according to the head of Private Wealth Research at Craigs Investment Partners Mark Lister, Omicron is unlikely to derail the economic recovery and will probably be another setback in the "two steps forward, one step back" reality of living with the virus.

However, it might still prove troublesome.

ASB senior economist Jane Turner says it is too early to know what the degree of threat the new variant will pose, "...but it is a timely reminder that the pandemic is far from over and many uncertainties and risks remain".

"We should expect further weakness in the short-term, especially with many markets having performed so well and with major indices close to record highs," Lister says.

"On Friday the S&P 500 in the US suffered its worst daily drop since February, erasing the gains from November.

"European shares were hit even harder, while oil prices tumbled and bond yields fell as investors flocked to the safety of US Treasuries.

"As is often the case during a period of market weakness, the local market might hold up better than most. It is dominated by healthcare, utilities, property and infrastructure-type businesses."

He says when the market is focussed on rising interest rates the highly-priced tech sector finds itself out of favour, and when virus variants are a threat the tech sector is very much a haven.

"If Omicron is indeed more transmissible or resistant to vaccines, remote working, online shopping and anything digital will be in demand."

"Some volatility in the weeks ahead feels likely, although this could be short-lived if it proves a relatively benign strain and the concern blows over quickly. This could mean any weakness is a buying opportunity."

Turner says the Omicron variant reinforces the Reserve Bank of New Zealand’s decision to lift the Official Cash Rate in “considered steps”, opting for a 25 basis point lift, rather than a 50 basis point lift.

"The RBNZ’s message to financial markets was that, yes – interest rates do need to go up, but how high remains uncertain so don’t get too far ahead of yourselves," she says.

"Indeed, a new vaccine-resistant Covid-19 variant really would materially hamper the recovery for the New Zealand and global economy next year."

Turner says domestically, the RBNZ is wary of how much mortgage rates have already lifted, and – as strong as the economy has been over 2021 – is mindful of the number of headwinds facing households over 2022.

"Higher interest rates and the rising cost of living outstripping wage increases could have quite the cooling effect on spending.

"Furthermore, credit conditions are tightening beyond just the lift in mortgage rates – tighter Loan to Value Ratio restrictions are just kicking in, along with some banks beginning to impose debt-to-income lending limits."

Lister says an important positive is that during periods like this, the NZ dollar almost always falls in response.

"This is a very important shock absorber for our economy. It makes our export sector immediately more competitive while offsetting any decline in value for our international share investments."

Tags: ASB Covid-19 Craigs Investment Partners Financial advice financial resilience Mark Lister