The global economy – already grappling with the war in Ukraine and the risks of stagflation it stokes – braces for greater disruption as China scrambles to contain its worst COVID-19 outbreak since the start of the pandemic. pandemic.
Since Wuhan two years ago, China has been relatively successful in minimizing disruption by quickly bringing virus cases under control. Now, the geographic spread of infections and the higher transmissibility of the omicron variant are challenging the country’s warmongering pandemic strategy of aggressively testing and locking down entire cities or provinces.
If China fails to contain the spread of the omicron, further movement restrictions would derail the economy’s promising start to the year, weakening a key pillar of global growth.
As a global manufacturer, any disruption in exports leading to shortages could also drive up inflation internationally, just as central banks begin raising interest rates, as the Federal Reserve is expected to do on Wednesday.
A survey of fund managers released Tuesday by Bank of America Corp. showed that confidence in global growth was the weakest since July 2008 and stagflation expectations jumped to 62%. The survey was conducted the week of March 10.
“You take all these little paper cuts and you start adding them up and you could be looking at a potential significant downturn in the global economy,” said Jay Bryson, chief economist at Wells Fargo & Co.
It all depends on how quickly China can contain the virus. The country reported more than 5,000 new infections on Monday for the first time since the early days of the pandemic. Although a small outbreak by global standards, it is prompting authorities to lock down more cities, with more than 45 million people prevented from leaving their homes.
The 17.5 million residents of Shenzhen whom we quarantined on Sunday for at least a week. The city is located in Guangdong, the manufacturing powerhouse province, which has a gross domestic product of $1.96 trillion, around that of Spain and South Korea, and accounts for 11 percent of the Chinese economy, according to Bloomberg Economics.
Guangdong’s $795 billion in exports in 2021 accounted for 23% of China’s shipments that year, the most of any province.
Bloomberg Economics warns restrictions in Shenzhen could deal the heaviest hit to coronavirus-related growth since a nationwide lockdown in 2020, with the added threat of sending supply shocks rippling around the world. Morgan Stanley cut its growth forecast for the year to 5.1%, below the government’s target of around 5.5%.
On Monday, residents of Jilin province in the northeast were asked not to leave or travel. The region of 24 million people is home to Changchun, an industrial hub of some 9 million people that accounted for around 11% of China’s total annual auto production in 2020.
Beijing has pledged to reduce the impact of virus checks on the economy by making them more targeted and shorter.
Shenzhen – which aims to complete its lockdown within a week during which it will test the entire population three times – and the Dongguan export hub both said factories outside the most at-risk districts can continue to operate if they keep staff in a bubble with regular testing.
Yet manufacturers who were already complaining about rising costs following the war in Ukraine are starting to take a hit.
Apple Inc.’s key supplier, Hon Hai Precision Industry Co., said it was halting production at its Shenzhen sites, joining global automakers Volkswagen AG and Toyota Motor Corp, which halted some operations in the province. north of Jilin.
“Given that China is a major global manufacturing hub and one of the most important links in global supply chains, the country’s COVID policy can have a significant impact on the business of its trading partners and the economy. world,” said Tuuli McCully, head of Asia-Pacific Economics at Scotiabank.
Data on Tuesday showed China’s economy rebounded strongly in January and February, driven by a strong recovery in household spending and investment by state-owned enterprises.
But economists have warned that those readings are already in the rearview mirror given developments since late February. National Bureau of Statistics spokesman Fu Linghui said on Tuesday that the shutdowns as well as pressure from rising costs and possible disruptions could weigh on growth.
Congestion is starting to build in some Chinese ports, which could drive up container freight rates again. Concerns about further supply chain disruption come just as US West Coast ports begin processing some of the pandemic backlog, helped by a lull following the Chinese New Year holiday.
According to a spokesperson for the Port of Los Angeles, about 20% of the cargo entering the busiest container gateways in the United States comes from the Shenzhen area.
The global impact of a COVID-related shutdown in China could be similar to the lockdown that disrupted supply chains when a container ship blocked the Suez Canal last year, according to Vice President Stephanie Loomis. international purchases from freight forwarder CargoTrans, Inc.
“If they don’t let any of these guys go into factories and produce goods, then nothing will move,” she said. “It’s just going to stop.”
Whether China’s COVID playbook can continue to contain the virus and minimize the negative fallout on the world will soon become clear, said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“The outbreaks impose a downside risk to China’s economy at least in the coming months,” he said. “A slowdown in China would exacerbate the risk of stagflation and global supply chain issues.”