Covid is still a big problem for China – and it’s a problem for the global economy

For much of the world, it has been hoped for some time that the worst economic shocks of the Covid pandemic are in the rearview mirror. In China, however, there are strong reminders that risks to the global economy remain.

Three years after the virus first spread, protests in several Chinese cities against the Beijing government’s strict zero Covid policies have reignited concerns in financial markets about the economic costs of the pandemic. Global oil prices fell, while the Chinese yuan and stock markets across Asia took a hammer blow.

New daily Covid cases have continued to rise, surpassing peaks seen during strict lockdowns in Shanghai earlier this year. With the continued use of stringent controls to contain outbreaks, the patience of China’s population of 1.4 billion appears to be strained. Even though Beijing announced “20 steps” earlier this month to relax its zero-Covid approach, it hasn’t gone smoothly.

The crucial unknown is how long the protests will last and how Beijing will react. What is clear is that China’s economic outlook is dire no matter what the authorities do.

“Staying zero-Covid would require strict local shutdowns in areas where outbreaks are occurring: these areas currently generate nearly two-thirds of China’s GDP,” said Mark Williams, chief economist for the Asia within the consulting firm Capital Economics.

If there was a rapid lifting of restrictions, it could risk overwhelming China’s healthcare system. This in turn could lead to a strict national lockdown with an economic impact similar to that of early 2020, he added.

Covid cases in China

As one of the biggest buyers of natural resources to fuel its industrial sector, the outlook for lower demand in China – due to ongoing shutdowns or political unrest – could weigh on the world’s second-largest economy. These are among the reasons why global commodity prices have fallen.

But while falling oil prices – at a time of sky-high energy costs – could help weather the worst inflationary storm in decades, there are other headwinds to consider.

China has played an increasingly central role in global supply chains over the past 30 years of economic liberalisation, ensuring that lockdowns affecting the country’s vast industrial base have major international consequences. This is clear from the inflationary shock that rippled through Western countries – after demand for manufactured goods exploded in the face of tight supply chains, as factories grappled with severe delays in deliveries from Asia, shortages of key components and exorbitant transport costs.

Vladimir Putin’s invasion of Ukraine has exacerbated the shock, sending inflation to its highest level in decades and pushing a third of the global economy into recession, including the UK, several countries in the euro zone and possibly the United States.

It had been hoped that the worst of the supply bottlenecks would begin to ease, including at the Bank of England, where it is among the considerations behind forecasts of a sharp fall in inflation later on. 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 possibility of further severe lockdowns in China and new supply chain problems could push into the opposite direction.

Major global investors have been betting recently that inflation in advanced economies is near or even peaking, which could allow central banks to reverse tough moves to raise interest rates. European stocks have rebounded around 20% since early October as hopes for the US Federal Reserve to “pivot” away from sharp increases in borrowing costs have risen.

“What’s happening in China reminds us of the fact that Covid is still a very big problem in the world’s second-largest economy,” said Ian Stewart, chief economist at accounting firm Deloitte.

For a global economy still reeling from a succession of economic shocks, there are risks of another developing.

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