A recent news article published in the Bloomberg talks about China’s Tug of War.
Covid Zero
Hello!! Today we look at China’s Covid-Zero struggles, US inflation and what low real interest rates mean for the world’s biggest economy.
China’s economy is caught in a tug of war between lockdowns to curb Covid’s spread and stimulus to keep the ambitious growth target in reach.
So far, the Covid restrictions have the upper hand — with implications for companies and economies around the world.
Sony cites lockdowns in China
Sony became the latest this week to cite lockdowns in China for supply constraints that are hampering production of its PlayStation 5 machines, following similar warnings from the likes of Apple.
A gauge of manufacturing fell to the lowest in two years in April and factory prices remain elevated to as lockdowns hinder supply chains.
The logistics snarls are coinciding with a property slump that’s deep enough to show up on the Federal Reserve’s worry list.
It devoted a whole section of its semi-annual financial stability report to China’s housing market, noting “the transmission of stresses to the United States could be strong” if the fallout intensifies and weakens banks and growth.
Promise from Chinese policy makers
Chinese policy makers have promised a package of extra government spending and tax cuts worth about 4.5 trillion yuan ($668 billion) to support the economy.
But as Enda Curran and Tom Hancock write, that’s not going to be enough to buoy the global economy this time around, even with China’s bigger share of output.
Officials are trying to do the impossible, says Helen Qiao, chief economist for Greater China at Bank of America: Hit a 2022 growth target of about 5.5% and maintain Covid Zero while also reducing debt.
“In previous cycles, policy makers predictably came up with coordinated easing measures in monetary, property, and fiscal policies to boost investment growth,” she says. “This time round, China seems to have much more reservation against leverage buildup, along with concerns on oil-led inflation and Fed tightening.”
Opinions of economists
Most economists say China’s growth target will be unattainable while ever authorities stick with Covid Zero.
But the human cost of dropping that approach are enormous: China risks a “tsunami” of coronavirus infections resulting in 1.6 million deaths if the government abandons the policy and allows the omicron variant to spread unchecked, according to researchers at Shanghai’s Fudan University.
And so the tug of war continues and the world watches on.
The Economic Scene
The US releases its consumer price index for April on Wednesday amid predictions from economists that the peak may have been reached in March, when inflation accelerated 8.5%.
A slowdown to a still high 8.1% is anticipated, mainly because of energy prices levelling off.
To see the impact of inflation in the economy, Katia Dmitrieva took a road trip to the Texas town of Midland, where price gains have hovered near 10% for the past six months, more than any of the about 400 metropolitan areas tracked by Moody’s Analytics.
Hot Spot
Midland, Texas, has had the longest bout of high inflation in the US over the past year.
Over the period, the West Texas oil-industry hub has had it even worse than big-city hotspots such as Atlanta and Phoenix.
Need-to-Know Research
Greg Mankiw, a professor at Harvard and onetime adviser to President George W. Bush, is the latest to join the debate over what low real interest rates mean for the US government.
While he says greater government debt is likely “not problematic” from the budget point of view given cheaper borrowing costs, there are still risks.
“A Ponzi-like scheme of perpetual debt rollover might fail, and such a failure would make an already-bad state of the world even worse,” he wrote in a new essay. “In addition, even if a perpetual debt rollover succeeds, the increased debt could still crowd out capital, reducing labor productivity, real wages, and consumption.”
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Source: The Hour
