Analysis
Covid’s still a big issue for China – and that’s
trouble for global economy
Richard
Partington
Economics
correspondent
The economic outlook for China is not good however its
leaders respond to anti-lockdown protests
Mon 28 Nov
2022 16.49 GMT
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.
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