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Report Card for World Economy Post-Covid: Get Better Soon!

China’s decision to scrap its zero Covid policy marks – hopefully – the final chapter in a pandemic that’s dominated the world economy for more than two years. That’s good news for households, businesses and investors, writes Andrew Kenningham.

25 June 2023

Since its first appearance in Wuhan in late 2019 the coronavirus, and efforts to contain it, have buffeted the world economy. As with the illness, recovery will take some time. But the economy should eventually get back to reasonable health now that the pandemic is on the way out.

The pandemic economy

Looking back, the impact of Covid-19 on the world economy had three main phases.

In the first phase there was a huge slump in economic activity as lockdowns swept around the globe. Apart from the obvious human suffering, this caused equity and commodity prices to slump.

In the second phase, which began soon after, governments and central banks provided massive financial support to businesses and households. With Covid restrictions still in place, households spent a lot on goods such as new computers and second-hand cars, and invested in property and equities.

The third phase, which we are still in, has seen the economy gradually reopen.

However, the world is still living with the legacy of the pandemic itself and the policy medicine used to treat it. In some countries a lot of older workers and/or migrants have left the labour force, causing staff shortages. Inflation has rocketed everywhere, prompting policymakers to step on the brakes by raising interest rates.

Covid ends where it began

China’s government stuck stubbornly to its zero Covid strategy until the end of last year and was the last major economy to reopen. But in a sudden policy reversal, Beijing abandoned its zero Covid strategy at the end of last year and let the virus spread.

Most observers expected China’s transition to “living with Covid” to take many months and involve occasional lockdowns and a lot of disruption to manufacturers.

But in the event the virus has ripped through China’s population at lightning speed. By early January it was estimated 70 per cent of the population of large cities such as Shanghai had already had the illness. Information on the health impact is difficult to get, but hospitals seem to have been overwhelmed.

Re-opening is good for the Chinese economy …

With the number of infections now declining fast, Chinese people have regained their confidence. Traffic on the Shanghai metro had slumped to a third of its pre-pandemic level in December, but has now fully recovered.

This is good news for China’s economy. A rebound in shopping, travel and hospitality is well underway and if the reopening is achieved fairly smoothly, manufacturers should also thrive.

… and good for the rest of the world

This should also provide a shot in the arm, so to speak, for the rest of the world.

Admittedly, there will be some negative side effects. Perhaps most importantly, strong growth in China risks pushing up global energy prices. Chinese imports of gas plunged last year because its economy was so weak; as activity rebounds demand for energy will surge and this may push up prices throughout the world.

However, the benefits of China’s reopening for the world economy should be more important.

Beijing’s U-turn has already led to a surge in Chinese visitors to Hong Kong, Japan and other Asian countries, and should lead to more Chinese tourism elsewhere. High demand for raw materials is bad news for some, but will help countries that produce metals and agricultural raw materials as well as energy. And countries such as Germany will see a boost in their exports of machinery and cars to China.

Light at the end of the tunnel

While many forecasters expect 2023 to be another very difficult year as the world convalesces, there are several reasons for optimism. Inflation should come down quite rapidly as the imbalances caused by the lockdowns and government policy support work themselves out of the system.

Prices of assets such as equities and property have been on a roller coaster ride during the pandemic years, but are now getting back to more realistic levels. By the second half of this year, if not earlier, inflation should be on a clear downward path, interest rates should be stable or falling, and asset prices will, hopefully, be on the rise.

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