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China’s Covid lockdowns threaten to fuel US inflation as economic pessimism grows

China’s Covid lockdowns threaten to fuel US inflation as economic pessimism grows

 


Topline

As rising cases in Shanghai threaten further shutdowns in the region, experts warn that China’s pandemic crackdown this spring could be the last headwind for the US economy, fueling rapid inflation that the Federal Reserve is trying to fight back by easing its monetary stimulus.

Highlights

The effects of China’s stay-at-home mandates on the U.S. economy should “become apparent” in government data released next month, Bank of America’s Aditya Bhave said in a note to clients Friday morning, noting that the US will primarily feel the impact via supply – chain breaks and resulting inflation.

While he doesn’t believe the shutdowns will cause a new spike in annual inflation, Bhave expects a “short burst of upward pressure” on property prices that could slow the pace at which overall prices cool. .

‘China lockdowns are another headache for the Fed in its fight against inflation,’ economist says of potential implications, noting any ‘lasting impact’ on inflation should be clear by now September, when the Fed is expected to decide whether it will. raise interest rates by another 50 basis points or become less aggressive.

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In a separate note on Friday, Bank of America analyst Ethan Harris said he was “getting more pessimistic” about the economy as a range of indicators continued to hint at more persistent inflation, placing the odds of a recession starting next year at 33%, roughly matching the 35% rating Goldman projected last week.

The latest warnings come as Shanghai, which has hit record cases in an omicron variant outbreak this spring, Friday connected its first new Covid cases outside quarantine zones in five days, prompting authorities to close all supermarkets and street shops in some neighborhoods as the metropolis of 26 million nears the eighth week of a city-wide lockdown.

The shutdowns have led to factory shutdowns that have been an “epic disaster” for some tech companies, notes Wedbush analyst Dan Ives, who points out that Tesla, which operates its so-called Gigafactory in the region, and Apple are among the hardest hit.

Key Context

Although China has largely avoided a large wave of Covid infections since its initial outbreak in late 2019, the omicron variant quickly crossed some regions this spring, resulting in a record number of cases and nearly two months of lockdown. At the height of the wave in late April, some regional experts valued only a third of manufacturing workers were able to go to work in hard-hit Shanghai. Retail sales in the region crushed nearly 50% last month, while industrial production fell 61.5%, marking its biggest monthly drop since 2011.

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“The reopening of Shanghai is the most critical development for global markets,” said analyst Adam Crisafulli of Vital Knowledge Media in a Friday morning note. “If this city can reopen and stay reopened, that would be a huge tailwind for everything.”

TANGENT

Soaring inflation and the resulting threat of higher interest rates have rattled markets in recent weeks and fueled fears of a possible recession. The tech-heavy Nasdaq has fallen nearly 29% this year, while the S&P 500, down 20%, plunged into bearish territory on Friday. As the economy struggles to deal with painfully high inflation, which has forced the Fed to go on alert, Moody’s economist Mark Zandi puts the chances of a recession at nearly 50% within 24 coming months.

Further reading

China faces Omicron tsunami if it abandons controversial zero-Covid policy, researchers warn (Forbes)

Shanghai finds cases after five days of ‘zero COVID’ but end of lockdown on track (Reuters)

Stocks continue to fall as a growing number of Wall Street pundits warn of rising recession risks (Forbes)

Full coverage and live updates on the coronavirus

Sources

1/ https://Google.com/

2/ https://www.forbes.com/sites/jonathanponciano/2022/05/20/china-covid-lockdowns-threaten-to-fuel-us-inflation-as-economic-pessimism-grows/

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