The rapid spread of the Omicron variant has many worried about the impact on economic growth. The World Bank released a forecast last week stating that additional supply-chain disruptions, labor shortages, and the reduction in fiscal support would slow global growth to 4.1% in 2022 from 5.5% last year. For the U.S., GDP growth is forecast to slow to 3.7% in 2022 from 5.6% in 2021. China could see the biggest dent, with GDP growth falling to 5.1% in 2022 from 8% in 2022.1
These growth forecasts are all lower than they were just three months ago.
I will get into some of the reasons for these falling economic forecasts below. But let me give readers the bottom line first: the World Bank, International Monetary Fund, and other forecasting institutions – such as the Congressional Budget Office and even the Federal Reserve – are almost always wrong. When forecasts grow more bleak or pessimistic, that is usually a reason to be hopeful, in my view. If growth outperforms expectations, that is generally good news for stocks.
The spread of the Omicron variant is certainly not helping the economic expansion, but here is the real question: Is Omicron hurting the expansion as much as forecasters think it is?
According to the World Bank, the latest disruptions have sunk international trade by 8.4% and industrial production by 6.9%, compared to where those figures should have been absent Covid-19. Yet as of mid-2021, global trade was already 5% higher than it was in December 2019, before the pandemic arrived. In my view, this recovery in trade is better than just about anyone expected it to be, which again may help explain the stock market’s resiliency throughout this period.
China is also a growing concern in the current environment. China is still pursuing a zero Covid-19 strategy, and flare-ups recently have led to harsh restrictions and mass testing on a scale not seen since the beginning of the pandemic. Some major manufacturers have shuttered factories, and workers have been in short supply due to restrictions in various provinces. Major multinational corporations like Nike, Volkswagen, and Samsung have already reported production snags that could impact inventories and sales.
The worry is that China’s reduced production capacity could result in further damage to an already compromised global supply chain, especially given how much the world relies on Chinese exports. To put this in perspective, China’s trade surplus is expected to have hit a record high in 2021.
It’s not all bad news, however.
The World Bank is also projecting that some economies are likely to strengthen in 2022, particularly those that were impacted most during the earlier phases of the pandemic. Among those expected to see stronger growth from 2021 are countries like Indonesia, Thailand, Malaysia, and Vietnam, all of which are emerging factory and manufacturing powerhouses that have learned how to navigate the pandemic without instituting full economic shutdowns.
The World Bank also offered a silver lining to the potential economic issues brought on by Omicron, in stating that supply bottlenecks and labor shortages should ease throughout the new year and that inflation and commodity prices should also come down in the second half.
Bottom Line for Investors
For the most part, people are drawn to negative news stories or those with a pessimistic bent. So when an organization like the World Bank issues forecasts that stress risk and call for falling economic growth rates, it usually grabs our attention. No matter that the World Bank and other forecasters are almost always wrong.
Case-in-point: a year ago, the World Bank forecast global economic growth of 4% in 2021, but the actual growth rate is estimated to be closer to 5.5%. That may not seem like a big miss, but it actually means the World Bank missed by over 25%. That’s significant.
In 2022, the World Bank is calling for an “increased risk of a hard landing” for the global economy. Similarly, the World Economic Forum’s annual risk report said that 84% of business leaders and experts were concerned about the growth outlook for 2022, while only 4% were optimistic. For investors, I think it’s important to take these negative outlooks as positive news: if growth outperforms even by just a little, that is usually all the support stocks need.
Disclosure
1 Wall Street Journal. January 11, 2022. https://www.wsj.com/articles/omicron-supply-chain-troubles-to-slow-growth-world-bank-says-11641918947
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