China's widest Covid- 19 outbreak since the beginning of the pandemic in late 2019 is hampering tourism and spending during the peak summer holiday, prompting analysts to review their economic forecasts as risks escalate.
Authorities rushed to cancel tourist sites, call off cultural events and shut flights as the outbreak linked with highly infectious delta variant affected nearly half of China's 32 provinces within two weeks. At least 46 cities have encouraged residents to refrain from traveling unless it's absolutely necessary.
Alongside recent flood damage in parts of the country, the latest virus controls will likely stop retail spending and economic growth in the second half of the year.
Nomura Holdings Inc. lowered its projection for third quarter growth to 5.1% from 6.4% earlier and sees 4.4% expansion in the final three months of the year, down from 5.3%. For the full year, Nomura cut its GDP forecast from 8.2% to 8.9%.
The stringent measures taken by the government have resulted in potentially China's most stringent travel bans and lockdowns since the spring of 2020, said Lu Ting, Nomura's chief economic operative for China. Recent rainstorms and flooding -- both worse than expected - necessitated a downward adjustment of the GDP growth forecast for the third quarter.
Goldman Sachs Group Inc. said the potential impact on third quarter growth could be 0.7 percentage points, although it didn't lower its 6.2% growth forecast for the quarter, saying there are uncertainties about the duration of the outbreak and likely stronger policy support. Natwest Group Plc and Bloomberg Economics Plc. also see downside risks to their growth forecasts.
Even though China has faced sporadic virus flare ups in the past year, they have been much smaller in scope and contained quickly. The current outbreak has closed all tourist sites in Zhangjiajie, a renowned sightseeing destination in central China. Other cities in the provinces of Hunan, Jiangsu and Shanxi have also closed tourist locations.
Airlines announced 9.8% less seating capacity in China this week than last week, the second drop in a row, based on data from the OAG scheduling expert. Capacity now stands at 95.7% of 2019 levels. It's the first time in five weeks that carriers have offered fewer seats in the country than they did in the comparable pre-pandemic period.
The current outbreak adds to a fragile recovery in retail sales and weighs on improving headwinds to economic growth in the second half of the year. Analysts expect a likely slowdown in exports and cooling property and infrastructure investment.
'Residents' wage growth was already lagging, and if they can't spend their money due to the outbreak it will surely be a drag on consumption in the second half of this year, said Bruce Pang, senior researcher at China Renaissance Securities Hong Kong.
Bloomberg Economics estimates retail sales could contract approximately 0.2% month-on-month in July and August, similar to the impact seen during outbreaks at the beginning of the year in Hebei and Jilin provinces. For the year as a whole, retail sales growth will likely fall short of the previous projection of 12%.
Authorities are already on guard for slow growth in coming months, and have pledged fiscal and monetary support to cushion the recovery. The government has proposed a GDP growth target of more than 6% in this year.
Production has been spared a nationwide lockdown of the sort that slammed the economy in early 2020. Even so, the chances of another reserve requirement ratio reduced to cushion the blow to the economy are increasing - and consumption could use a little such insurance.
Qingdao International Beer Festival, China's largest beer festival, was called off early and Yunnan province in southern China canceled the Torch Festival, a local tourist event. More than a dozen music festivals in several cities have been closed or postponed, and cinemas in Nanjing, Zhangjiajie and Lianyungang were canceled?
The latest outbreak has spread to Beijing despite the capital city's stringent measures, with authorities taking steps Tuesday to prevent rail passengers from 23 regions, including Zhengzhou, Nanjing, Yangzhou, Shenyang and Dalian. The Shanghai financial hub of China also reported a virus case this week.
Cases haven't been found in areas with heavy industrial or export activities so far, which means the impact on production should be limited, said Iris Pang, chief economist for Greater China at ING Bank NV.
'If there are cases in New locations that are major cities of services or manufacturing, then it would affect economic activities, she said.