World Bank Cuts China Forecast As Uneven Recovery Gets Rougher

THE WORLD BANK has trimmed its GDP growth forecast for China this year to 5.0%, 0.4 of a percentage point lower than its previous forecast made in October last year. The Bank says that growth could slow to 4.0% on a worst-case basis.

The new numbers are contained in the Bank’s latest update to its economic forecasts published ahead of its joint Spring meeting with the International Monetary Fund.

The reasons for the growth downgrade are familiar: a spike in Covid-19 infections causing strict lockdowns and disruption of supply chains, continuing strains on overleveraged property developers, the Russian invasion of Ukraine raising commodity prices, and tightening US monetary policy.

The Bank also highlights China’s structural slowdown and regulatory regime change.

It has this to say about China’s approach to containing Covid-19:

Eliminating CoViD-19 infections through a combination of testing-tracing-isolation and targeted shutdowns entailed a relatively small economic cost when the COVID-19 variants were less infectious. However, the highly transmissible but seeming less potent Omicron variant has increased the economic costs and reduced the health benefits of an elimination strategy. Both services and manufacturing PMis dropped in January reflecting CoViD-19 flare-ups and strict control under Beijing’s zero CoViD strategy.

Despite the changing tradeoffs, China is maintaining the strict strategy, perhaps because (a) tolerating low levels of infection may not be a stable equilibrium, (b) a spike in infections could overwhelm China’s limited health capacity in rural areas, and (c) the omicron variant may still have serious health consequences for China’s population because it has suffered fewer prior infections and been inoculated with a less effective vaccine.

The Bank estimates that the impact of pursuing zero-COVID will likely be to reduce 2022’s output by about 0.6%.

A longer-term Covid-related question raised by the Bank is whether the interruption caused by the pandemic to the trend decline in China’s share in the final-goods imports of the United States and the rising sourcing of intermediate goods from China by regional countries is temporary or not.

Leave a comment

Filed under Economy

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s