CHINESE REOPENING TO BOOST THE GLOBAL ECONOMY?

05.01.2023 After three years of widespread anti Covid lockdowns, China has now moved to a laissez- faire herd immunity strategy. Below we look at the implications for the Chinese and global economies.

China’s previous Covid policy was a zero-tolerance approach. There were frequent lockdowns, often in response to just a cluster of cases. As a means of reinforcing the policy there was a regime of mass testing and compulsory quarantine.

In response to a period of civil unrest China has now moved to a laissez-faire herd immunity strategy. Epidemiologists are predicting one to two million deaths as a result of the policy change (in a country of 1.4 billion). This reflects the lower effectiveness of Chinese vaccines against the Omicron variant as well as lower vaccination rates amongst the elderly.

In the first half of the year the impact of the new policy will likely be contractionary as a wave of Covid cases overwhelms the healthcare system, dampens consumption and disrupts production. However, by the second half of 2023 the Chinese economy will have effectively reopened. This is expected to boost the demand for oil, energy and commodities. Overall, in the second half of 2023 the economy could grow by ten percent on an annualized basis.

For advanced economies the impact of Chinese reopening is likely to slow the decline of inflation rates back to their targets. It will also make the central banks of these economies cautious about cutting interest rates before 2024.

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This post was written by Robin