Covid outbreak hampering China's economic growth in secondhalf
- China's broadest Covid outbreak since the beginning of the pandemic in late 2019 is hampering tourism and spending during the peak summer holidays, prompting analysts to review their economic growth projection as risks escalate.
Authorities rushed to cancel tourist sites, close cultural events and investigate flights as the outbreak linked to the highly infectious delta variant reached almost half of China's 32 provinces within 2 weeks. At least 46 cities have advised residents to stay away from traveling unless it is absolutely necessary.
Along with recent flood damage in parts of the country, the latest virus controls will likely curb retail spending and economic growth in the second half of the year.
Nomura Holdings Inc. has lowered its projection for third-quarter growth from 6.4% previously and sees 4.4% growth in the final three months of the year, down from 5.3%. For the full year, Nomura cut its GDP forecast to 8.2% from 8.9%.
'The measures taken by the government are potentially producing the most stringent travel bans and lockdowns in China since the spring of 2020, said Lu Ting, Nomura’s chief economist for China. 'Recent rainstorms and flooding - both worse than expected - necessitate a downward adjustment to our GDP growth forecasts for the third quarter.
Goldman Sachs Group Inc. said the potential impact on third-quarter growth would be 0.7 percentage points, although it did not 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. see downside risk to their growth forecasts.
Even though China has faced sporadic virus flare-ups over the past year, they have been much smaller in scope and contained quickly. The current outbreak has closed all tourist sites in Zhangjiajie, a famous scenic destination in central China. Other cities in the provinces of Hunan, Shanxi and Jiangsu have closed tourist locations too.
Airlines cancelled 9.8% less seat capacity in China this week than last week, the second drop in a row based on data from OAG consulting specialist. Capacity is now at 95.7% of 2018 levels. It's the first time 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 expanding headwinds for economic growth in the second half of the year. Analysts expect a likely slowdown in exports and cooling property investment.
'Residents' wage growth is 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 the year, said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong.
Bloomberg Economics estimates retail sales could contract about 0.2% month-on-month in July and August, similar to the impact witnessed during outbreaks in Hebei and Jilin provinces at the beginning of the year. It said that retail sales growth for the year as a whole will likely fall short of the 2014 projection of 12%.
Authorities are already on guard for slower growth in coming months, and have pledged fiscal and monetary support to cushion the recovery. The Government was focusing on GDP growth in 2014 of more than 6%.
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 cut to cushion the blow to the economy are increasing - and consumption could use a little such insurance.
Hong Kong International Beer Festival, China's largest beer festival, was cancelled early, and Yunnan province in southern China called off the Torch festival, a local tourist event. More than a dozen music festivals in various cities were postponed or canceled, and cinemas were shut in Nanjing, Zhangjiajie and Lianyungang.
The latest outbreak had spread to Beijing in spite of the capital's stringent measures, with authorities taking steps Tuesday to ban train passengers from 23 regions including Zhengzhou, Nanjing, Yangzhou, Shenyang and Dalian. The financial hub of Shanghai also had a virus case this week.
Cases haven't been found in areas with heavy export or industrial activities that means the impact on production should be limited, said Iris Pang, chief economist at ING Bank NV.
'If there are cases in recent locations that are major cities of services or manufacturing, then it would affect economic activities, she said.