A one-two punch for the US economy

Investors around the world sold stocks and oil prices dropped sharply on Monday as Omicron cases surged and governments imposed anti-virus measures that could hamper economic growth.

But the US faces a second potential blow after Sen. Joe Manchin, a Democrat, said on Sunday that he will not vote for President Joe Biden’s economic and climate plan.

Dow futures fell 370 points — or more than 1% — by 6:45 a.m. ET on Monday, while benchmark Brent crude was down about 3% at $71 a barrel. Major stock market indexes in Europe and Asia fell by around 2%.

“Global markets are pricing in … greater growth concerns on the back of the weekend’s Omicron-related news. Dimmed prospects for the US fiscal package may also be playing a role,” Mohamed El-Erian, chief economic adviser at Allianz, said Monday on Twitter.

For an Omicron preview, look to Europe: The Netherlands is under a strict lockdown. In the United Kingdom, the government has asked people to work from home and it has not ruled out further restrictions before Christmas. Germany, Denmark and Ireland are also taking steps to stem the variant.

“Even if booster shots are effective at reducing the medical risks, a rapid spread of Omicron could still overburden health systems and force countries to follow the Netherlands and adopt more economically damaging restrictions,” said Berenberg chief economist Holger Schmieding.

If that were to happen, the eurozone and the United Kingdom could both see their economies shrink by 1% in the first quarter of 2022, compared with the final three months of this year, he added. Germany, the region’s biggest economy, is already teetering on the brink of recession.

The fast-spreading variant threatens to add pressure to already stretched supply chains and exacerbate inflation. If US consumers cut back on shopping, dining out and travel, that could also hurt the economy.

Biden has been pushing a $1.75 trillion bill that includes initiatives like universal pre-K for 3- and 4-year olds, child care assistance and child tax credits, and a federally funded paid family and sick leave program.

To get the Build Back Better Act through Congress, Biden needs Manchin’s vote. But the West Virginian has balked at the legislation’s price tag, and expressed concerns that it may add fuel to already soaring inflation.

Still, most analysts expected Manchin to eventually support the bill. That now appears to be a miscalculation.

Goldman Sachs told clients Sunday it no longer assumes the legislation will get through Congress after Manchin announced that he’s a “no.”

“A failure to pass BBB has negative growth implications,” Goldman Sachs economists, led by Jan Hatzius, said in the research report.

Citing the “apparent demise” of Build Back Better, the Wall Street bank now expects GDP to grow at an annualized pace of 2% in the first quarter, down from 3% previously.

Goldman Sachs also trimmed its GDP forecasts for the second quarter to 3% from 3.5% and the third quarter to 2.75% from 3%. It pointed to the expiration of the child tax credit and the lack of spending in other areas that had been anticipated.

For investors, the wave of bad news could mean a rough end to 2021.

“It’s a lot more like Halloween than Christmas,” Societe Generale analyst Kit Juckes wrote in a research note Monday.

The world’s second biggest economy is cutting rates
China’s central bank cut its main interest rate for the first time in 20 months, as authorities step up efforts to boost an economy that has been hit by pandemic-related curbs, a real estate slump and an unprecedented crackdown on private enterprise.

While Monday’s rate cut is small, it’s the first such move since April 2020, when China slashed the LPR to boost its Covid-hit economy, which had just contracted for the first time in more than 40 years.

“The cut reinforces our view that authorities are increasingly open to cutting interest rates amid looming economic headwinds,” said Zhaopeng Xing, senior China strategist at ANZ, in a research note on Monday.

A cut to the lending rate can help reduce borrowing costs for households and firms and in turn encourage consumer spending and investment.

Unlike the West, Beijing had refrained from flooding the economy with stimulus packages during the pandemic, focusing instead on offering targeted support to smaller businesses.

China was the only major economy to record growth in 2020, but this year the country’s expansion has been hit by several factors, forcing it to consider ways to provide support even as other major central banks withdraw stimulus and raise interest rates to fight inflation.

Flashback: Last week, the Bank of England became the first major central bank to raise interest rates since the start of the pandemic. The US Federal Reserve could follow with three rate hikes next year.