(Bloomberg) — China’s stringent lockdowns to curb Covid infections are taking a significant toll on the economy and roiling global supply chains, with President Xi Jinping under pressure to deliver on pledges to support growth.
The damage from shutdowns in April in major financial hub Shanghai, auto manufacturing center Changchun and elsewhere was laid bare by the first official data for the month released over the weekend. Both manufacturing and services activity plunged to their worst levels since February 2020, when the nation shut down to contain the first coronavirus outbreak, according to purchasing managers surveys.
Read more: China Maintains Covid Fight as Virus Lockdowns Pummel Economy
The strain on global supply chains is also becoming apparent, with the PMI data showing suppliers face the longest delays in more than two years in delivering raw materials to their manufacturing customers. Inventories of finished goods climbed to the highest level in more than a decade, while indexes for exports and imports slumped.
The figures came a day after the Communist Party’s Politburo, led by Xi, promised to meet its economic targets while at the same time sticking with its Covid Zero policy to curb infections. Economists see the two goals as contradictory, with many cutting their growth projections to well below the government’s official target of around 5.5%.
“I expect GDP growth in the second quarter to turn negative, as lockdowns will likely be on and off,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management. “The key issue going forward is how the government will fine-tune its ‘zero tolerance’ policy to mitigate the economic damage.”
Nevertheless, the Politburo’s comments — which were timed during the trading day — fueled a rally in stocks and the currency, with technology shares surging on signs of a possible easing of a regulatory crackdown on internet platform companies. Investors were also encouraged by comments suggesting a loosening of property restrictions and a push to boost infrastructure investment.
Xi appeared to soften his stance toward the private sector, telling the Politburo meeting that the healthy development of private capital should be encouraged. At the same time, he said capital must be regulated and shouldn’t undermine the objectives of common prosperity.
The pledges by top leaders came as omicron virus outbreaks continue to spread, with growing fears of a lockdown in Beijing. The capital city tightened Covid requirements over the weekend after more infections were reported following rounds of mass testing of its 22 million population.
Citizens are now required to provide negative nucleic acid test results within 48 hours in order to enter any public venue during the five-day Labor Day holiday. Dining-in at restaurants is banned during the period, and indoor venues including theaters, internet cafes and gyms will suspend operations. The Universal Studios theme park in Beijing also announced it would temporarily close from Sunday to comply with epidemic prevention measures.
In Shanghai, where large swaths of the population have been locked down for a month or more, the government announced on Sunday that six districts met the criteria for zero community spread of Covid-19 and can loosen restrictions. Zero community spread means reporting no local Covid infections for three consecutive days and if the new daily case counts are less than 0.001% of the area’s population for the same period.
As manufacturer to the world, the lockdowns in China mean possible shortages of goods and add another risk to global inflation. Despite repeated calls from the authorities to ensure smooth logistics, container goods were still left sitting at Shanghai’s port for weeks.
“There was plenty of evidence of worsening supply pressures,” Mitul Kotecha, head of emerging markets strategy at TD Securities, wrote in a note. “While there has been some gradual easing in some cities and provinces, manufacturing has struggled due to logistical and supply chain pressures.”
The economy is also losing the one strong pillar that had helped drive its recovery from the 2020 lockdowns. The PMI survey released Saturday showed the new export order sub-index plunged deeper into contraction to its worst level in nearly two years, while the import sub-index was the lowest since February 2020.
Activity is likely to remain depressed throughout the second quarter as virus restrictions are tightened in several places. The fear of widespread outbreaks has ruined the prospect of a bump in consumption during the five-day Labor Day break, which is usually one of the busiest seasons for domestic tourism.
A 7.9% contraction in gross domestic product in Jilin province in the first quarter is also a warning sign on the kind of damage other regions can expect. The northeastern province of Jilin, of which Changchun is the capital, was locked down in March, and restrictions are only now starting to be lifted.
“We remain deeply concerned about growth,” Nomura Holdings Inc. economists wrote in a note. “Despite the raft of policy measures announced by the Politburo meeting, we still believe markets should remain focused on the development of the pandemic and the corresponding Zero Covid strategy. All other polices are of secondary importance.”
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
