As China emerges from the pandemic and reopens its economy, it promises to be a double-edged sword for the global economy. On one hand, China’s growth will offer a much-needed boost to counter sluggishness in Europe and the threat of a looming recession in the US. However, unlike in 2009, when China’s stimulus helped jumpstart a global recovery from the financial crisis, this time there’s a catch: a surge in inflation at a time when central banks are struggling to bring it under control.
Kristalina Georgieva, the head of the International Monetary Fund, recently emphasized China’s pivotal role in shaping the global growth outlook for 2023, but also warned of its potential impact on inflation. “What if China’s faster growth leads to a spike in oil and gas prices, putting upward pressure on inflation?” she asked at the World Economic Forum in Davos.
According to Bloomberg Economics, China’s GDP is expected to accelerate from 3% in 2022 to 5.8% in 2023, which could drive consumer prices up by nearly 1% in the final quarter of the year. If China exceeds expectations and grows at 6.7%, this impact could be even greater.
In a global context of rising consumer price inflation, hitting 9.1% in the US and 10.6% in the euro area, this may not seem significant. However, with central banks focused on bringing inflation back to their 2% target, even a modest impact from China could be a game-changer. If China’s rebound keeps US inflation stuck around 5% in the second quarter, as models suggest, it could complicate the Federal Reserve’s plans to halt interest rate hikes at its May meeting.
For the rest of the world, China’s reopening means an additional $500 billion in demand, equivalent to adding the spending power of another Nigeria to the global economy. Already, this anticipation is driving up commodity prices, as service industries and retailers prepare for the return of Chinese consumers. Copper prices have surged above $9,000 per ton, and Chinese oil consumption is forecast to hit a record this year. Air New Zealand is adding flights to Shanghai, and luxury brands such as LVMH and Swatch Group are poised for a sales boost. China’s reopening may even help shorten the UK’s recession by attracting high-spending tourists.
In conclusion, while China’s reopening presents a bright spot for the global economy, it also poses a significant challenge to central banks grappling with rising inflation. As the world watches China’s growth trajectory, it must prepare for the potential inflationary consequences of this economic powerhouse’s re-emergence.