Editorial: Unease at what China’s Covid wave means for global economy

Passengers arriving from China are tested for Covid-19 on arrival at Milan Malpensa Airport, Italy. Photo / AP

The holiday break is a quiet time for the financial world, but the evolving situation in China is causing differing assessments about what’s coming.

The head of the International Monetary Fund gave a New Year update that amounts to a blunt warning that China’s Covid-19 wave could further threaten the already strained economic picture.

In an interview with CBS, managing director Kristalina Georgieva said that 2023 would be “tougher than the year we leave behind”, because the major economic drivers - the United States, European Union and China - were slowing at the same time.

“We expect one-third of the world economy to be in recession. Even countries that are not in recession, it would feel like recession for hundreds of millions of people,” she said.

The IMF had cut its 2023 forecast for global growth in October, based on factors such as the war in Ukraine and inflation. The IMF has projected global growth to be at 2.7 per cent, compared to 3.2 per cent last year.

In the interview, Georgieva focused on what was happening now in China, New Zealand’s largest trading partner. The second-largest economy in the world would come back to the pack: at or below global growth for the first time in four decades. Covid in China would be a further drag on growth.

“For the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative, the impact on the region will be negative, the impact on global growth will be negative.”

Georgieva also said the US may avoid recession, although various analysts have been less optimistic about that.

China’s previously strict zero-Covid approach had already weakened its economy with disrupted supply chains of goods, from smartphones to cars and investment.

Now, with restrictions going, infections could mean more supply chain disruption in the first half of the year. Covid cases reportedly contributed to China’s factory activity shrinking in December for the third month in a row, and at the quickest rate in almost three years.

Australia’s Treasurer Dr Jim Chalmers said on Monday: “The Covid wave in China is already having a substantial impact on supply chains. We expect that to get more difficult before it eases.”

The other aspect to consider is that Beijing’s painful U-turn will, in a brutal and chaotic way, result in China reconnecting to the world, which would be economically beneficial.

US analysts hope that haphazard landing in a storm will help global markets and smooth supply chains. Goldman Sachs, for instance, said last week that despite the strain on China’s medical system, re-opening would overall be good for its economy.

Georgieva said she expects China to move gradually to a “higher level of economic performance, and finish the year better off than it is going to start the year”.

For now though, it’s the most risky, large-scale and uncertain shift to ‘living with Covid’ attempted. And for outside countries, the early pandemic lesson about dependency on China’s economy has resurfaced.

Chalmers said Australia was heavily reliant on China for economic goods, and Beijing’s new policy could have a “substantial” impact on the Australian economy.

New Zealand can hope and aim to be resilient in a world-sweeping storm, but would still be buffeted.