The global economy—already struggling with war in Ukraine and the resulting turmoil in oil and other commodities markets—is bracing for greater disruption as China scrambles to contain its worst outbreak of Covid-19 in the two years since the pandemic began.
The country has demonstrated remarkable success in bringing spikes in infections under control. Now the geographic spread of cases and higher transmissibility of the omicron variant is challenging its zero-tolerance strategy of aggressive testing and locking down whole cities or provinces.
If China fails to contain omicron’s spread, further movement restrictions would derail the economy’s promising start to the year, weakening a key pillar of global growth. “The outbreaks impose downside risk to China’s economy at least in the next few months,” says Zhiwei Zhang, chief economist at Pinpoint Asset Management in Hong Kong. “A China slowdown would exacerbate the risk of stagflation and global supply chain problems.”
Any disruptions in China’s exports could fan inflation internationally, adding to the challenge for the Federal Reserve and other central banks that are attempting to tame inflation with interest-rate hikes without tipping their economies into recession.
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