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.
COVID ZERO
China is the last holdout in pursuing COVID Zero, a strategy that prioritizes control and elimination of the virus through stringent restrictions like lockdowns and mass testing. Many experts still think Beijing won’t ease curbs and open up this year, though some have said the country’s virus strategy could continue to be tweaked, allowing for some flexibility.
The government could boost confidence should it detail a road map for eventually reopening to the rest of the world, according to Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.
“The main uncertainty facing China’s COVID fight is that the exit strategy is not clear going forward,” he said. “The zero tolerance policy is likely to be unsustainable in long term in terms of economic costs and the burden on normal people’s daily lives.”
Larry Hu, an economist at Macquarie Capital Ltd., said policy makers will have “no choice but to step up stimulus in the coming months” in order to meet the GDP growth target this year.
“We maintain our annual GDP forecast of 5 per cent, as more policy easing would come through,” he said, predicting a benchmark interest rate cut in April, as well as more support for infrastructure and property sectors.
OTTAWA – The Canadian economy was flat in August as high interest rates continued to weigh on consumers and businesses, while a preliminary estimate suggests it grew at an annualized rate of one per cent in the third quarter.
Statistics Canada’s gross domestic product report Thursday says growth in services-producing industries in August were offset by declines in goods-producing industries.
The manufacturing sector was the largest drag on the economy, followed by utilities, wholesale and trade and transportation and warehousing.
The report noted shutdowns at Canada’s two largest railways contributed to a decline in transportation and warehousing.
A preliminary estimate for September suggests real gross domestic product grew by 0.3 per cent.
Statistics Canada’s estimate for the third quarter is weaker than the Bank of Canada’s projection of 1.5 per cent annualized growth.
The latest economic figures suggest ongoing weakness in the Canadian economy, giving the central bank room to continue cutting interest rates.
But the size of that cut is still uncertain, with lots more data to come on inflation and the economy before the Bank of Canada’s next rate decision on Dec. 11.
“We don’t think this will ring any alarm bells for the (Bank of Canada) but it puts more emphasis on their fears around a weakening economy,” TD economist Marc Ercolao wrote.
The central bank has acknowledged repeatedly the economy is weak and that growth needs to pick back up.
Last week, the Bank of Canada delivered a half-percentage point interest rate cut in response to inflation returning to its two per cent target.
Governor Tiff Macklem wouldn’t say whether the central bank will follow up with another jumbo cut in December and instead said the central bank will take interest rate decisions one a time based on incoming economic data.
The central bank is expecting economic growth to rebound next year as rate cuts filter through the economy.
This report by The Canadian Press was first published Oct. 31, 2024
