For U.S. Inflation, China’s Slowdown Is a Double-Edged Sword

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China’s manufacturing juggernaut is being punished by lockdowns in Shanghai and elsewhere. The impact on prices will spread.

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The first channel is further grit in the global supply chain. Stringent measures to contain the Omicron variant in the world’s largest manufacturer have thrown a wrench into global production and logistics networks. Many cities, including Shanghai, have been in lockdown for weeks. Factories have been shut and ports congested. China’s industrial production in April fell 2.9% year on year while exports growth in dollar terms decelerated to 3.9%—the slowest pace in almost two years.

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Things could improve in the short term as Shanghai—a major port and business center—plans to gradually reopen, but China’s zero-tolerance approach toward Covid-19 doesn’t seem to be going away. There may be on-and-off lockdowns across the country and disruptions to business activities for quite some time, potentially pushing up the prices of manufactured goods globally throughout this year and into 2023.

Slower exports from China and easing of port congestion in the US West Coast have recently meant lower freight rates. But the container backlog in Shanghai port as Chinese exports rebound to make up for lost time will also likely spill over to the West Coast in the summer months, according to Fitch Ratings.

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One saving grace is that as the US economy continues to open up, consumption has switched back toward services from goods, which might help lessen the strain on Chinese and global production and logistics networks.

To make things even more complicated, however, China’s zero-Covid policy also has a separate, dampening effect on global inflation: Slower growth in the world’s top consumer of most key industrial commodities puts a lid on rising material prices. Industrial metal prices like iron ore and copper have fallen in the past month or so—particularly since China’s housing market remains sluggish on top of the headwinds from Omicron.

Perhaps most important from the US perspective, Chinese lockdowns and slower industrial activity also mean lower demand from the world’s largest oil importer. Despite a rebound in April, China’s crude imports year to date have fallen 4.9% from the same period in 2021. The US Energy Information Administration and International Energy Agency both cited softer consumption in China when they revised down their 2022 oil demand forecasts this month.

For US consumers pinched both by high gasoline and high consumer goods prices, a steep slowdown in China’s manufacturing juggernaut both giveth and taketh away.

Write to Jacky Wong at [email protected]

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Credit: www.Businesshala.com /

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