* Governments looking to ease curbs, dial back stimulus
* Economy "functions right through" COVID - Fed's Powell
* Easing pandemic protocols risks creating complacency
* Omicron less virulent, but vaccination rollouts still key
* China remains a stand-out with "COVID-zero" policy
By Mark John and Howard Schneider
Jan 18 (Reuters) - Governments worldwide are easing quarantine rules, reviewing coronavirus curbs and dialling back pandemic-era emergency support as they bid to launch their economies back into some version of normality.
The moves, motivated by the lower severity of the Omicron variant and the need to keep workers in work and the global recovery on track, have generated a whiff of optimism that has lifted oil and stock prices.
Health experts say the variant's rapid spread may yet herald a turning point in the pandemic.
However, they add, much depends on how authorities manage ongoing vaccination rollouts and balance other health measures still needed, while persuading their citizens not to throw caution to the wind.
"We are taking a big step and that also means we're taking a big risk," Dutch Prime Minister Mark Rutte said last week before stores, hairdressers and gyms reopened in a partial lifting of a lockdown despite record numbers of new cases.
That lockdown was already something of a rarity, with most western countries well past that stage and focussed on how to safely open up further.
Around half a dozen have cut quarantine times from 10 to five days, citing Omicron's faster infection cycle as grounds to loosen rules that have led to a wave of worker absences hitting businesses.
Britain and Israel have eased requirements for follow-up PCR tests after a lateral flow result as Omicron's soaring infection rates overload laboratories. Local media say Britain could announce further easing of restrictions later this month.
Omicron's ability to rifle quickly through a population without causing a proportionate rise in hospitalisations and deaths even prompted Spain's prime minister to suggest it be treated akin to an endemic illness like flu.
LIVING WITH THE VIRUS
While few are using that specific word, policymakers whose priority now is to wean economies off the cheap money fuelling inflation have started to depict the coronavirus as something businesses and households must learn to live with.
"What we are seeing is an economy that functions right through these waves of COVID," U.S. Federal Reserve Chairman Jerome Powell said last week.
"If the experts are right and Omicron is going to go through really quickly and peak perhaps within a month and come down after that, I think it is likely you will see lower hiring and perhaps a pause in growth, but it should be short-lived."
Such a scenario would facilitate the Fed's full-on turn towards normalising policy this year with as many as three interest rate hikes. Other central banks also looking to wind back stimulus share that view.
"It (Omicron) is proving very contagious but less deadly, so economies will live with it," one European Central Bank policymaker told Reuters, adding the bank's baseline scenario assumed a "continued resolution of the health crisis in 2022".
Similarly the Bank of Japan, while listing Omicron as a risk, is seen sticking to its view that the local economy will pursue a recovery driven by robust exports and massive state spending.
If that upbeat outlook materialises, governments would also be able to start winding back the emergency fiscal support which, according to the International Monetary Fund, led to the largest one-year surge in global debt since World War II.
In October, the Fund forecast global economic growth of 4.9% this year, while underscoring uncertainty posed by the coronavirus. It postponed the release of its latest outlook to Jan. 25 to factor in latest Omicron developments.
KEEP ON VACCINATING
The rosy economic picture is also predicated on vaccination campaigns at sufficient levels to limit serious illness.
That means ramping up access to shots in the developing world as wealthier countries focus on the boosters that widespread evidence, including hard data from Italy and Germany, shows offer significant protection against the risk of hospitalisation, intensive care and death.
Dutch COVID-19 hospitalisations, for instance, while off all-time pandemic peaks around 2,000, remain above 900.
That is impacting workplace absences and acute care for other conditions, and the government is hoping to quickly increase a booster shot coverage rate of around 50% of adults, relatively low by euro zone standards.
Another fly in the ointment for any early return to normal may prove to be China's resolve to pursue a strict "COVID-zero" strategy likely to lead to shutdowns hitting supply chains and therefore its trade partners.
And while the belief that the global recovery can live with Omicron may be expedient, it may yet run up against the hard facts of epidemiology.
Lawrence Young, Professor of Molecular Oncology, University of Warwick, said U.S. and Japanese studies showing that more than 30% of cases remain highly infectious after five days suggest moves to relax quarantine rules could backfire.
"This is a policy decision ...based on the need to get people back to work," he said. "...Returning people after five days risks highly infectious people returning to work or school."
He and other experts said those risks could be mitigated by strict enforcement of lateral flow testing, mask-wearing and contact-limiting - a tricky health message for authorities perceived to be easing up on some rules.
"There's a big sense that we're coming out of all of this," said Young. "But I think it's an interesting, dangerous period if people are too complacent about it." (Reporting by Mark John in France; Howard Schneider in Washington; David Stanway in Beijing; Dhara Ranasinghe in London; Leika Kihara in Tokyo; Francesco Canepa in Frankfurt; Josephine Mason in London; Toby Sterling in Amsterdam; editing by John Stonestreet)
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