China’s economy plummets and threatens the global economy

When countries around the world falter in the face of the pandemic’s headwinds, China has often stood out, seemingly impervious to the financial pressures hampering growth.

But now, hampered by its effort to contain the spread of Covid-19 with widespread lockdowns and mass quarantines, China has suffered one of its worst quarters in years, threatening a global economy that relies heavily on Chinese factories and consumers.

For the ruling Communist Party, the slowdown could increase pressure on Beijing at a delicate time. China is scheduled to hold its party congress later this year. A thriving economy and growing wealth were part of the plan that Chinese citizens accepted in exchange for living under an authoritarian regime.

But the lockdowns, a staple of Beijing’s “zero Covid” policy, have increased the risk of instability, both social and economic.

China’s National Bureau of Statistics said on Friday that the economy grew 0.4% year-on-year in the second quarter – worse than some economists’ expectations. It was the slowest growth rate since the first quarter of 2020, when the country effectively shut itself down to fight the early stages of the pandemic, and its economy shrank for the first time in 28 years.

The 2020 slowdown was short-lived, with the Chinese economy recovering almost immediately. But the current outlook is not so promising. Unemployment is close to the highest levels on record. The housing market remains chaotic and small businesses bear the brunt of weak consumer spending.

“China is the big hit in the global economy,” said Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund. “China is not in a position to be the global engine of growth right now, and long-term fundamentals point to much slower growth over the next decade.”

This is an unwelcome complication in a year when China is trying to project unshakable strength and stability. At the party congress, Xi Jinping, the country’s leader, is expected to win another five-year term, further consolidating his grip on power.

In May, Li Keqiang, China’s prime minister, called an emergency meeting and sounded the alarm on the need to bolster economic growth for more than 100,000 business and local government officials. The strong warning cast doubt on China’s ability to meet its previous growth target of 5.5% this year.

Slowing Chinese growth complicates an already fragile global economy. Rising inflation has increased the risk of recession in the United States, while Russia’s invasion of Ukraine has driven up energy prices and disrupted supply chains across Europe. In earlier times of economic crisis, China has eased financial pressures with access to cheap manufacturing and a largely untapped market of consumers eager to spend.

But China is no longer growing by leaps and bounds. Covid-19 restrictions have combined with policies implemented in recent years – such as clamping down on real estate speculation and curbing the power of China’s tech giants – to exacerbate the slowdown. So far this year, Starbucks, Nike and Hilton have all warned that weak spending in China has depressed sales.

While much of the world has learned to live with the coronavirus, China has adopted a “Covid zero” policy to do whatever it takes to prevent infection. Under this policy, residents of an entire apartment building can be confined to their homes for weeks if a single tenant becomes infected. A few positive cases can cause an entire neighborhood of a city to be blocked.

Even as the price of these policies became apparent, Xi did not waver. He said he is willing to put up with passing economic hardship to keep citizens free from Covid.

The most recent economic malaise came in April and May, when Shanghai, China’s largest city, went into lockdown for nearly two months and the impact rippled through the economy. Office buildings were closed and workers were forced to stay at home. Across China, hundreds of millions of consumers have been cut off, leaving shops, restaurants and service providers without customers.

Retail sales, an indicator of how much consumers are spending, fell 4.6% from April to June from a year earlier, according to the government. And even as the economy improves in June, the threat of more mass quarantines could derail this nascent recovery.

Japanese securities firm Nomura estimated that as of Monday, 247 million people in 31 cities were under some form of lockdown in China, covering about a fifth of the national population and representing the equivalent of about $4. 3 trillion in annual Gross Domestic Product. The number of affected cities nearly tripled from the previous week.

Beijing has urged local authorities to step up measures to ensure job stability during the lockdowns. However, with so many small and medium-sized businesses struggling financially, the government has struggled to rein in rising unemployment.

In June, unemployment was at 5.5%, an improvement from April and May, but close to the highest level since China began releasing figures in 2018. For 16-24 year olds seeking employment , which include college graduates, the unemployment rate more than tripled at 19.3%.

Translated by Luiz Roberto M. Gonçalves