How are coronavirus lockdowns affecting China’s economic output?

Will China’s zero Covid policy slow its economic growth?

The Covid-19 lockdown in Shanghai has cast a shadow over China’s economic outlook for the rest of 2022. Investors will pay particular attention to this week’s reading of first-quarter gross domestic product, which will set the tone how aggressively policymakers in Beijing will have to act to support the world’s largest emerging market.

The lockdown in Shanghai – China’s financial capital – began in late March, meaning its full impact will not be recorded in the first quarter report. However, the GDP data will provide clues to the extent to which the coronavirus outbreak has hit China’s economy, as it will include less severe lockdowns in manufacturing hubs in Shenzhen and Jilin.

Economists polled by Reuters expect first-quarter gross domestic product to rise 4.4% year-on-year. Dhiraj Nim, an economist at ANZ, says the headline reading will mask a much weaker quarterly rise that is expected to be just 0.6%, better reflecting the decline caused by past lockdowns enforcing China’s zero-Covid strategy.

Column chart of annual GDP change (%) showing China's economy rebounding from initial Covid shock

“This stance has also led to recent lockdowns in Shanghai as the pandemic spread, heightening second-quarter GDP downside risks,” Nim said. He doesn’t expect China to get the current outbreak under control before the end of April, a scenario that ANZ says will lower annual GDP growth this year to just 5% from 8.1% in 2021.

But he adds that “if China’s slowdown proves deeper, it will force a review of the growth prospects of the economies in the region”.

ANZ estimated that for every 1 percentage point decline in the country’s growth over the past 15 years, growth in the rest of Asia fell by 0.6 percentage points. With more and more Asian central banks struggling with runaway inflation, policymakers in the region will be even more sensitive than usual to any decline in Chinese growth. Hudson Locket

Will runaway inflation dampen retail sales in the UK?

UK retail sales are set to weaken in the coming months as Covid-19 restrictions are eased, with consumers returning to spending more on services and less on goods as they cut spending in response to the cost of living crisis.

“A normalization of spending habits towards activities such as eating out and going to the movies will likely mean less spending in the retail sector,” said Martin Beck, chief economic adviser at EY Item Club.

In February, Britons spent 0.7% more than the previous month in sterling terms, but bought 0.3% less in terms of quantity as goods became more expensive. Volumes are expected to have fallen by the same margin in March as consumers faced consumer price inflation soaring to 7%, a 30-year high.

“Some households may be able to tap into savings built up during the pandemic,” Beck said, “but many will not have that luxury. Thus, retail demand is expected to come under increasing pressure as we move forward into 2022. »

Bethany Beckett, an economist at Capital Economics, also expects the coming months “to only become more difficult for retailers as the cost of living crisis begins to have a greater impact.”

Consumer confidence fell significantly in March and high inflation could mean a prolonged period of negative real wage growth. “Against this backdrop, it seems almost inevitable that households will continue to cut spending,” Beckett said. Valentina Romei

How does the war in Ukraine affect the eurozone economy?

The President of the European Central Bank, Christine Lagarde, did not mince words. Russia’s invasion of Ukraine, she said last week, could prove even more damaging to business confidence and investment than the pandemic. The S&P Global Purchasing Managers Index for April, to be released on Friday, will reveal the extent to which European companies are already feeling the impact.

Russian President Vladimir Putin’s decision to invade Ukraine in late February drove up food and energy prices, pushing eurozone inflation to a record 7.5% last month. Some analysts fear Europe is heading into a 1970s-style recession or stagnation – a period marked by rapid inflation and slow economic expansion.

Line chart of the S&P Global Composite Output Purchasers' Index* showing that economic activity in the Eurozone has increased in recent months

Economists expect the euro zone’s composite PMI, which combines responses from top executives of services and manufacturing companies, to fall to 54 in April from 54.9 in March. A score above 50 indicates that a majority of respondents reported expansion.

In a sign of how the conflict in Eastern Europe is already weighing on market sentiment, German investor confidence – measured by research institute Zew’s Economic Sentiment Index – fell last week to its lowest level since March 2020.

“The picture is not particularly rosy,” said Caspar Rock, chief investment officer at Cazenove Capital. “It wouldn’t surprise me at all if the impression fell below 50.” george steer

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