Under normal circumstances it would be something to be met with optimism. All indications are that the growth rates of the Chinese economy will be higher in 2023 than the initial forecasts of growth of just over 4% and certainly much higher than the rates of 2022 when the Chinese economy paid a heavy price for the zero covid policy chosen by the Chinese government.
On the contrary, under the weight of social discontent over the restrictive measures, the leadership of the Chinese Communist Party made a very big policy shift and basically adopted a policy of lifting the restrictions, hoping that it can withstand the epidemic wave (please also read the analysis entitled “The Real Picture of Chinese Economic Growth“).
What does the Chinese turn mean?
This shift means that there will be more consumer activity in China, that we will not have the problems we had with the local lockdowns last year which also meant closed production units and port problems, causing, among other things, disruptions in supply chains , but also that tourism in China will increase significantly, both domestic and foreign, i.e. Chinese travel abroad. In fact, it is expected that Chinese travel abroad by the end of 2023 will have reached 75% of pre-pandemic levels.
All this “restart” of the Chinese economy obviously also means stronger growth rates, while it is possible, due to the great gravity of the Chinese economy, and an upward “correction” of global GDP trends.
The possibility of inflationary pressures
But Chinese growth is not just about the supply side, the side of increasing Chinese production and product supply. China is also the second largest importer in the world. So a recovery in Chinese economic activity will mean a corresponding increase in demand. Except that this could also mean new inflationary pressures. For example, it could mean an increase in energy prices, especially oil, because an increase in economic activity in China also means increased energy consumption.
This not only concerns the American economy but also the Japanese economy which is already facing the highest inflation in many years.
But in this case, the G7 economies, whose central bankers have indulged in successive interest rate hikes as a key anti-inflationary policy and hoped that slowing growth and essentially a recessionary dynamic would contain inflation, are likely to face the need to increase interventions through interest rates.
Of course, one could say that anyway the FED and other central banks had decided to significantly advance key interest rates, consciously entrenching a policy of recession and increasing unemployment, one that – as has often been underlined – their way of thinking cannot see another way of responding to the possibility of high inflation. ΄
But that doesn’t mean they aren’t aware that a prolonged cycle of rate hikes carries several risks. It threatens to raise the cost of borrowing – not only for businesses but also for countries – and entrench a recessionary dynamic. On the other hand, a maintenance of relatively high inflation rates and in fact combined with low or even zero growth rates is also a problematic condition.
This explains why China’s expected economic recovery in the coming months is seen as both a blessing and a headache. Because on the one hand it can give a boost to the global economy as a whole, on the other hand it can strengthen inflationary trends.
However, if inflationary pressures appear to persist, the FED in particular is sure to stick with an aggressive interest rate policy, precisely because this is a deeply entrenched way of thinking and is unlikely to move in any other direction. That adds particular interest to how its administration will move at next week’s rate-setting meeting, against the backdrop of a slight retreat in US inflation and higher-than-expected growth rates.
Of course, whether and how China’s recovery will trigger new inflationary pressures will also depend on other parameters. For example, the fact that regardless of the price ceiling, Russian oil production continues normally for those countries not involved in the sanctions, means that the looming increased supply of Russian oil could also act as a mechanism to contain the increase in its price.
At the same time, this condition reflects more general contradictions that permeate the global economy and especially the developed economies. For example, despite the debate over the primacy of demand as a causal factor in inflation (combined with exogenous factors such as the war in Ukraine), which in turn prompts options to induce a recession through restrictive policy in response, the problems are more about supply, from the state of supply chains to the problems of reduced productivity growth and reduced profitability.
