POLITICS & INSTITUTIONS - ECONOMY

Forecast

Omicron could impact economic scenario



The economic scenario will be dependent on the evolution of the covid-19 pandemic, says Statec.  Photo: Shutterstock

The economic scenario will be dependent on the evolution of the covid-19 pandemic, says Statec.  Photo: Shutterstock

Statec, the grand duchy’s statistics bureau, in a publication on 17 December confirmed that Luxembourg’s economy will clearly slow down over the coming year. While employment is expected to grow, the currently rising number of infections could have a strong impact on the country’s economy.

Luxembourg’s GPD is expected to grow by 3.5% in 2022, after a 7% growth in 2021. However, Statec considers two scenarios amidst the fifth wave of covid-19 infections, vaccination campaigns and an increasing rate of Omicron infections. Considering current trends, the more pessimistic scenario, where stricter health restrictions are imposed, is more likely to occur, says the bureau. “Dampening demand and further disrupting value chains,” this scenario would result in a limited economic recovery and a negative impact on the financial markets.

Whereas a rapid vaccination roll-out would potentially “reduce uncertainty and boost confidence among households and businesses,” so that citizens would use the savings accumulated during the crisis. This in turn would stabilise the economic recovery and bring the global GPD back to pre-Covid levels.

The Omicron variant

Currently, little is known about the long-term impact of the Omicron variant’s appearance. Though the variant, first identified by the South African health authorities, is more infectious than the Delta strain, those infected currently report milder symptoms, making its threat unclear, explains Statec.

Regardless, its discovery has caused panic in stock market exchanges, with a volatility of 50% observed, the highest level since October 2020. It impacted values linked to tourism, transport and luxury goods the most. The tourism industry was already highly impacted over 2021, with restaurants bearing the brunt of the shift in the economy the most.

Although Omicron’s impact is still unclear, “this news adds to concerns about the fifth wave of the epidemic, high inflation, supply problems and the prospect that monetary policies may be tightened faster than expected,” says the report.

Price surges at the heart of consumer worries

Amid covid waves. the EU labour market still saw an 0.9% increase during the third quarter of 2021, with Luxembourg recording near pre-pandemic levels of unemployment, with sectors of communication and information seeing the biggest growth while retail, transport and the service industry recorded a decrease of 3.7% in comparison to the end of 2019.

Despite the increase in employment, consumers do not feel economically safe. This is due to the climbing inflation rate--in November of this year, Luxembourg recorded a climb to 4.5%--and surging energy prices. The EU electricity sector relied more on fossil fuels like gas in 2021, with the extremely strong demand leading to soaring prices. As a result of that, some suppliers, like Luxembourg-based company Eida, had to shut down. Emission trading prices increasing has also impacted the price of energy.

And so, despite a stable economic growth over 2021, the appearance of a new covid-19 variant, stricter sanitary measures, energy prices soaring and consumer’s wary perception of their economic stability will make the lower economic scenario formulated by Statec a reality.