Yahoo Finance Covid’s still a big issue for China – and that’s trouble for global economy
For much of the world there has been hope for some time that the worst economic shocks from the Covid pandemic are in the rearview mirror. In China, however, there are important reminders that risks to the world economy still remain.
Three years since the virus first spread, protests in several Chinese cities against the Beijing government’s strict zero-Covid policies have reignited concerns in financial markets over the economic costs of the pandemic. Global oil prices have fallen back, while the Chinese yuan and stock markets across Asia have taken a hammering.
Daily new Covid cases have continued to rise, exceeding peaks seen during strict lockdowns in Shanghai earlier this year. With the ongoing use of tough controls to contain outbreaks, patience among China’s population of 1.4 billion appears to be being severely tested. Even though Beijing announced “20 measures” earlier this month to ease its zero-Covid approach, it hasn’t gone smoothly.
The crucial unknown is how long protests might continue and how Beijing will respond. What is clear is that the economic outlook for China is terrible whatever the authorities do.
“Sticking with zero-Covid would require strict local lockdowns in areas where outbreaks are happening: right now, these areas generate nearly two-thirds of China’s GDP,” said Mark Williams, the chief Asia economist at the consultancy Capital Economics.
If there was a rapid removal of restrictions, it could risk the Chinese healthcare system being overwhelmed. That could in turn lead to a strict national lockdown with an economic impact similar to that in early 2020, he added.
As one of the biggest buyers of natural resources to power its industrial sector, the prospects of lower demand in China – as a result of lockdowns or ongoing political unrest – could weigh on the world’s second-largest economy. These are among reasons why global commodity prices have fallen back.
But while falling oil prices – at a time of sky-high energy costs – could help ease the worst inflationary storm for decades, there are other headwinds to consider.
China has played an increasingly pivotal role in global supply chains in the past 30 years of economic liberalisation, ensuring that lockdowns affecting the country’s vast industrial base have major international consequences. This has been clear from the inflation shock rippling through western nations – after demand for manufactured goods roaring ahead of constrained supply chains, as factories struggled with severe delays on deliveries from Asia, shortages of key components, and sky-high freight costs.
Vladimir Putin’s invasion of Ukraine exacerbated the shock, sending inflation to the highest level in decades and pushing a third of the world economy into recession – including the UK, several eurozone nations and possibly the US.
There had been hopes the worst of the supply bottlenecks were beginning to fade, including at the Bank of England, where it is part of the consideration behind forecasts for a sharp fall in inflation later next year.
While the prospect of prolonged recessions in the UK and elsewhere will limit demand for goods and services – helping to ease inflationary pressures – the chance of tough new lockdowns in China and renewed supply chain issues could push in the opposite direction.
Major global investors have bet recently that advanced economy inflation is close to, or even at, a peak, which could enable central banks to ease back on tough action to raise interest rates. European equities have rallied by about 20% since early October, while hopes for the US Federal Reserve to “pivot” away from big increases in borrowing costs have risen.
“What’s happening in China reminds us of the fact that Covid is still a really big live issue in the world’s second-biggest economy,” said Ian Stewart, the chief economist at the accountancy firm Deloitte.
For a world economy still reeling from a succession of economic shocks, there are risks of another one developing.
