China’s economy faces fresh blow from Shanghai COVID lockdown

Shanghai’s sweeping, two-phase lockdown will likely deal a heavy blow to businesses reliant on consumer spending, though economists say the city’s industrial sector can largely withstand the disruption, mitigating threats to the global supply chain.

The staggered eight-day lockdown in Shanghai — a city of 25 million people — and lingering effects from the measure may shave up to 0.4 percentage point from China’s economic growth in the first and second quarter, compared to a year ago, according to estimates by Liu Peiqian, China economist at NatWest Group Plc.

The restrictions targeting half of the city at a time will bar the city’s residents from leaving home, an attempt to curb China’s worst COVID outbreak since Wuhan in early 2020. That will likely hurt employment in the services industry and weigh on small businesses the most.

“COVID suppresses people’s confidence and expectations for spending,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong. He also pointed to impacts on industries that rely on in-person and social gatherings, especially catering.

Liu, whose forecast for gross domestic product growth in the first quarter is 4.7 per cent, said the “gradual recovery” of the services and consumption sectors could take eight weeks.

As a major financial and trade hub, Shanghai contributes 3.8 per cent to the country’s GDP. It’s also the second-richest city, trailing only Beijing, according to the latest available figures from the National Bureau of Statistics.

Economists have been downgrading China’s growth forecasts for the year as outbreaks linked to the highly infectious omicron variant continue to spread. High frequency indicators and company statements released so far suggest a likely temporary hit to factory production as the government tries to minimize the fallout. The damage to consumer sentiment may be more lasting though, putting the government’s full-year growth target of about 5.5 per cent under threat.

Even before the Shanghai lockdown was announced, Nomura Holdings Inc. warned China’s economy faces its worst downward pressure since the pandemic began. The bank’s economists, led by Lu Ting, wrote in a note that markets should be concerned about a slide in growth in the second quarter as they downgraded quarterly forecasts for the rest of the year.

Factory activity likely took a knock in March, with the official manufacturing Purchasing Manager’s Index, which is scheduled for release on Thursday, probably slipping into contraction after the Shenzhen lockdown, according to Bloomberg Economics.

What Bloomberg Economics Says…

The lockdown in Shanghai — China’s international financial center and biggest city economically — and the measures leading up to it will have a direct impact on the Chinese economy that is comparable to the Shenzhen episode. But the negative hit to sentiment could be greater. So far the lockdown allows for continued operations at financial institutions and ports. Anything beyond the current plan risks disruptions to financial flows and international trade.

Chang Shu and David Qu

On supply chains, China can likely limit the damage as long as the lockdown doesn’t last longer than three weeks, according to Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd.

He said a so-called closed loop system tested in Shenzhen — where factory workers are living in dorms, working in a bubble separate from the general public — has lessened the impact on the economy. The southern technology hub of Shenzhen resumed normal operations Sunday, about two weeks after the government placed its 17.5 million residents under lockdown.

“Similar to Shenzhen, Shanghai is the economic powerhouse of the country,” Yeung said. “The scale is obviously larger but the action is swift, hoping to minimize the economic impact as soon as possible.”

The Shanghai port, the world’s largest, is still operating around the clock, according to local media reports. Chinese chipmaker Semiconductor Manufacturing International Corp is maintaining normal production at its facility in the city, and is complying with COVID prevention measures.

Tesla Inc., meanwhile, suspended production Monday, with operations to be halted for four days.

 

Source: BNN Bloomberg