The biggest economic hit of 2022 will come from China

The images of the closure of Shanghai are surely not as dramatic as the war in Ukraine, but its negative consequences for the global economy could be even greater.

The irony of things is that the country that first suffered from the pandemic and also the one that first managed to control it is plunged into a new wave of covid, although with very different characteristics, since the omicron variant is much more contagious but less lethal.

Faced with this new challenge, the Chinese strategy remains the same: annihilate the number of cases until they are zero, regardless of the economic costs.

The so-called covid zero policy, to which the Chinese authorities added the cryptic “dynamic” tagline a few months ago, entails massive lockdowns and quarantines for all identified cases, even asymptomatic ones.

If we add to this the terror of covid that Chinese citizens have developed, it can be understood how difficult it is proving to offer the minimally necessary services for confined cities to continue operating, not to mention manufacturing production and transport.

This last aspect is especially important for the rest of the world.

Although it is still difficult to estimate the size of the blow to the Chinese economy, we do have relatively reliable data on the loss of mobility due to the restrictions imposed to tackle covid cases.

In the first two weeks of April, the loss of mobility has been around a third compared to the average of 2019. As a point of comparison, the loss of mobility in the national geography from the end of January 2020 to the end of February it was double.

At that time, the most affected city was Wuhan while today it is Shanghai, with 5% of the national GDP and the main financial center of China.

Beyond the restrictions on mobility within a good number of cities equivalent to 40% of China's GDP, half of the highways are not passable and the ports work inefficiently.

In fact,

The consequences for China's economic growth are not reflected in the GDP growth of the first quarter, which has just been published, because the official data for the first months of the year have been exceptionally good.

This is why it is important to look at high-frequency data to understand the speed of China's economic decline.

This deterioration is not limited to the service sector but also to the manufacturing sector, since a good number of companies have decided to temporarily close their doors.

This problem is especially acute in the automotive and semiconductor industries.

There is no doubt that a sudden halt in Chinese manufacturing would have a huge negative impact on the global economy, as China exports up to a third of the world's intermediate goods.

Beyond the reduction in internal mobility, we cannot forget that, since the covid pandemic began in late January 2020, China's borders remain closed to the world, which also adds to the negative effects of the policy of response to the pandemic that it has adopted.

First of all, the collapse of exchanges with the rest of the world is one of the main reasons why China's foreign direct investment in the rest of the world has stagnated since the pandemic began, with the problems that this entails for emerging economies with large financing needs that had relied on Chinese capital for their infrastructure needs.

Beyond the economic aspects, the growing disconnection of the Chinese people with the rest of the world,

as well as the growing disconnection of the rest of the world with what is happening in China, are generating mistrust and fostering protectionism.

This situation does not bode well for future scientific or business collaboration between China and the rest of the world, which can only have a negative impact on the global economy.

A good example of how much the closing of borders can contribute to generating dystopian views of the other is the reading of the war in Ukraine by the Chinese media, which cannot be positive for the Chinese economy either by raising the risk that suffer secondary sanctions.

This situation does not bode well for future scientific or business collaboration between China and the rest of the world, which can only have a negative impact on the global economy.

A good example of how much the closing of borders can contribute to generating dystopian views of the other is the reading of the war in Ukraine by the Chinese media, which cannot be positive for the Chinese economy either by raising the risk that suffer secondary sanctions.

This situation does not bode well for future scientific or business collaboration between China and the rest of the world, which can only have a negative impact on the global economy.

A good example of how much the closing of borders can contribute to generating dystopian views of the other is the reading of the war in Ukraine by the Chinese media, which cannot be positive for the Chinese economy either by raising the risk that suffer secondary sanctions.

In short, the “dynamic” covid-zero policy that China is determined to maintain for a virus as contagious as the omicron is bound to greatly increase the economic cost of the pandemic in China at a time when the rest of the world has learned to live with the virus.

The negative consequences for the world economy are also important.

Beyond the lower demand for imports from China, the most immediate, and worrying, are the additional inflationary pressures due to the disruptions in the global production chains that China has dominated in recent years.

Finally, the lack of exchanges with the rest of the world does not bode well for the future of globalization.

Alicia García Herrero

is chief economist for Asia Pacific at Natixis and senior researcher at Bruegel.

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