Omicron set to halve fourth quarter global economic growth

Omicron is dealing a blow to the world economy just as the pandemic enters its third year as a drag on growth and driver of inflation.

According to the latest Bloomberg nowcasts, the global economy is expanding just 0.7% in the final three months of the year, half the pace of the previous quarter and below the rate of around 1% witnessed right before the crisis.

The euro-area is on pace for a 0.8% expansion in the fourth quarter from the previous three months, which is 0.3 percentage point less than what was projected in November. The US has strengthened slightly and is now registering a 1.2% pace.

Among emerging markets, where readings are based on annualized data, China has weakened to a 4.5% rate this quarter, while Brazil has slumped to 0.2%. Russia, India and South Africa also slipped.

"As 2021 draws to an end, the global economic recovery risks being thrown off track by the omicron variant of the coronavirus," said Tom Orlik, chief economist for Bloomberg Economics. "Particularly Europe looks vulnerable: Recoveries for Germany, France and Italy are increasingly under strain from the surge in cases."

Bloomberg nowcasts unite hundreds of data points from individual economies with the aim of providing a real-time read on growth rates and inflation levels across major economies weeks before official data is available.

China is tracking a 4.5% year on year expansion, down from 4.9%. Even worse, all the emerging economies slowed in the past month, led by a slide in Brazil. On a monthly basis, the euro-area and Japan are both weaker in December than November, while the US, Canada and the U.K. strengthened.

One upside is that having weakened in the third quarter, the US is accelerating to 4.9% from 2.1% on a quarterly basis, according to the nowcasts.

Despite the pullback, accelerating inflation continues to cast a shadow over the world economy too.

The US Federal Reserve's favored measure of inflation is rising 5% this quarter, up from 4.3% In the previous three months. Consumer prices in the euro-area and the U.K. are both advancing 4.4%, while those in China are up 2.1%.

Central banks are turning more aggressive in the face of such price pressures.

The Bank of England last week raised its key interest rate for the first time in three years, while the Fed paved the way to spend 2022 hiking its main rate from near zero after it ends its asset-purchase program in March.

Bloomberg Economics predicts Brazil, Mexico, Norway, New Zealand and South Africa will be among the central banks to raise borrowing costs in the first quarter of 2022.

With the pandemic still a major force, Bloomberg's economists estimate the US and euro-area still have economies smaller than would have been the case without the virus. However, China has already regained its pre-Covid trend.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.