Supply crisis threatens global economy as China fights COVID

The global economy, already struggling from the war in Ukraine and the risks of stagflation it is causing, is bracing for further disruption as China struggles to contain its worst COVID-19 outbreak since the start of the pandemic. .

Since the Wuhan episode two years ago, China has been relatively successful in minimizing disruption by quickly bringing virus cases under control. Now, the geographic spread of infections and the increased transmissibility of the omicron variant are challenging the country’s strict strategy of testing heavily and locking down entire cities or provinces.

If China fails to contain the spread of omicron, further restrictions on mobility could derail a promising start to the year for the economy, weakening a key pillar of global growth.

As a manufacturer to the world, any disruption to Chinese exports that results in shortages could also increase inflation internationally, just as central banks begin to raise interest rates, as the Federal Reserve is expected to do on Wednesday.

A survey of fund managers released Tuesday by Bank of America Corp. showed confidence in global growth at the lowest since July 2008 and expectations of stagflation rising to 62%. The survey was conducted during the week ending March 10.

Much depends on how quickly China can contain the virus. The nation on Monday reported more than 5,000 new infections for the first time since the start of the pandemic. While it’s a small outbreak by global standards, it’s prompting officials to lock down more cities and more than 45 million people find themselves restricted from leaving their homes.

The 17.5 million residents of Shenzhen were placed on lockdown on Sunday for at least a week. The city is located in the province of Guangzhou, a manufacturing powerhouse that has a gross domestic product (GDP) of US$1.96 billion, similar to that of Spain and South Korea. The province accounts for 11% of China’s economy, according to Bloomberg Economics.

Guangzhou’s exports worth US$795 billion in 2021 accounted for 23% of China’s shipments that year, the largest amount of any province.

Bloomberg Economics warns that restrictions in Shenzhen could inflict the biggest coronavirus-related blow to growth since a nationwide lockdown in 2020, with the added threat of the supply crisis spreading across the globe. Morgan Stanley cut its China growth forecast for the year to 5.1%, short of a target of around 5.5%.

Shenzhen — which aims to end its lockdown within a week, during which it will test the entire population three times — and the Dongguan export hub have said factories outside higher-risk districts can continue to operate if they keep staff. in a bubble with regular tests.

However, manufacturers were already complaining about rising costs in the wake of the Ukraine war.

Congestion is beginning to increase at some Chinese ports, which could push container freight rates up again. Concerns about further supply chain disruption come just as US West Coast ports are starting to process some of the pandemic backlog, helped by a lull after the Chinese New Year holiday.

About 20% of the cargo entering the busiest container gateways in the US is estimated to come from the Shenzhen region, according to a spokesperson for the Port of Los Angeles.

The global impact of a Covid-related shutdown in China could be similar to the lockdown that rocked supply chains when a container ship blocked the Suez Canal last year, according to Stephanie Loomis, vice president of international procurement at carrier CargoTrans Inc.